UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10KSB (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934 For the fiscal year ended October 2, 1999 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) of the SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _______________ Commission File Number I-6836 Flanigan's Enterprises, Inc. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Florida 59-0877638 - -------------------------------------------------------------------------------- (State of other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2841 Cypress Creek Road, Fort Lauderdale, FL 33309 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code, (954) 974-9003 Securities registered pursuant to Section 12(b) of the Act: Common Stock, $.10 Par Value American Stock Exchange ---------------------------- ----------------------- Title of each Class Name of each exchange on which registered Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No The aggregate market value of the voting stock held by non-affiliates of the registrant was $5,460,000 as of December 13, 1999. There were 1,950,000 shares of the Registrant's Common Stock ($0.10 Par Value) outstanding as of October 2, 1999. DOCUMENTS INCORPORATED BY REFERENCE Information contained in the Registrant's 1999 definitive proxy material has been incorporated by reference in Items 10, 11, 12 and 13 of Part III of this Annual Report on Form 10-KSB. Exhibit Index Begins on Page 34 PART I Item 1. Business General Flanigan's Enterprises, Inc., (the "Company") owns and/or operates restaurants with lounges, package liquor stores and an entertainment oriented club (collectively the "units"). At October 2, 1999, the Company operated 14 units, and had interests in seven additional units which have been franchised by the Company. The table below sets out the changes in the type and number of units being operated. FISCAL FISCAL YEAR YEAR NOTE 1999 1998 NUMBER TYPES OF UNITS - ------------------------------------------------------------------- Combination package and restaurant 4 4 Restaurant only 5 5 (1)(2)(3)(4) Package store only 4 3 (5)(6) Clubs 1 1 - ------------------------------------------------------------------- TOTAL - Company operated units 14 13 FRANCHISED - units 7 7 (4) Notes: (1) During the fourth quarter of fiscal year 1997, the Company formed a limited partnership and raised funds through a private offering to purchase the assets of a restaurant in Surfside, Florida and renovate the same for operation under the "Flanigan's Seafood Bar and Grill" servicemark. The Company acts as general partner and forty two percent owner of the partnership. The restaurant opened in the second quarter of 1998. (2) During the third quarter of fiscal year 1999, the lease for a restaurant operated by the Company in Fort Lauderdale, Florida expired and the Company elected not to renew the same. The furniture, fixture, equipment and liquor license used by the Company at this restaurant were sold to an unrelated third party. (3) During the third quarter of fiscal year 1998 the Company formed a limited partnership and raised funds through a private offering to purchase the assets of a restaurant in Kendall, Florida and renovate the same for operation under the "Flanigan's Seafood Bar and Grill" servicemark. The Company acts as general partner and forty percent ownership of the partnership. Due to delays beyond the control of the Company, the restaurant is currently being renovated and is expected to be open for business during the second quarter of fiscal year 2000. The restaurant is not included in the table of units. 2 (4) During the first quarter of fiscal year 1999, the Company purchased the Management Agreement of a franchise, which includes the right to manage the franchised restaurant, effective December 1, 1998. The franchise includes a package liquor store, which is still operated exclusively by the franchisee. The Company retains its interest in the franchise and continues to receive the same royalties and rent as it received prior to its purchase of the Management Agreement. (5) During the third quarter of fiscal year 1999, the Company opened a package liquor store in Fort Lauderdale, FL (6) During fiscal year 1996, one franchisee exercised the thirty day cancellation clause under the franchise agreement and related documents and returned its franchised unit to the Company. The franchisee had operated a package liquor store and lounge under the "Big Daddy's" servicemark. The Company profitably operated the package liquor store of the franchised unit but did not reopen the lounge. The lease agreement for the business premises expired on December 31, 1995 and the Company occupied the same on an oral month to month lease agreement, paying its prorata share of the real property taxes monthly and insuring the property until April 1998 when the oral month to month lease agreement was terminated and the package liquor store was closed. All of the Company's package liquor stores, restaurants and clubs are operated on leased properties. As a result of significant escalations of rent on certain of such leased properties and on leased properties that were not being operated by the Company, on November 4, 1985 the Company, not including its subsidiaries, filed a Voluntary Petition in the United States Bankruptcy Court for the Southern District of Florida seeking to reorganize under Chapter 11 of the Federal Bankruptcy Code. On May 5, 1987 the Company's Plan of Reorganization as amended and modified ("the Plan") was confirmed by the Bankruptcy Court. On December 28, 1987 the Company was officially discharged from bankruptcy. See Note 6 to the consolidated financial statements for a discussion of the bankruptcy proceedings to date and Item 7 for a discussion of the effect of the bankruptcy proceedings herein. The Company was incorporated in Florida in 1959 and operated in South Florida as a chain of small cocktail lounges and package liquor stores. By 1970, the Company had established a chain of "Big Daddy's" lounges and package liquor stores between Vero Beach and Homestead, Florida. From 1970 to 1979, the Company expanded its package liquor store and lounge operations throughout Florida and opened clubs in five other "Sun Belt" states. In 1975, the Company discontinued most of its package store operations in Florida except in the South Florida areas of Dade, Broward, Palm Beach and Monroe Counties. In 1982 the Company expanded its club operations into the Philadelphia, Pennsylvania area as general 3 partner of several limited partnerships organized by the Company. In March 1985 the Company began franchising its package liquor stores and lounges in the South Florida area. See Note 11 to the consolidated financial statements and the discussion of franchised units on page 6. During fiscal year 1987, the Company began renovating its lounges to provide full restaurant food service, and subsequently renovated and added food service to most of its lounges. The restaurant concept, as the Company offers it, has been so well received by the public that food sales now represent approximately 78.6% of total restaurant sales. The Company's package liquor stores emphasize high volume business by providing customers with a wide variety of brand name and private label merchandise at discount prices. The Company's restaurants provide efficient service of alcoholic beverages and full food service with abundant portions, reasonably priced, served in a relaxed, friendly and casual atmosphere. The Company's principal sources of revenue are the sale of food and alcoholic beverages. The Company conducts its operations directly and through a number of wholly owned subsidiaries. The operating subsidiaries are as follows: SUBSIDIARY STATE OF INCORPORATION - ---------- ---------------------- Flanigan's Management Services, Inc. Florida Flanigan's Enterprises, Inc. of Georgia Georgia Seventh Street Corp. Florida Flanigan's Enterprises, Inc. of Pa. Pennsylvania The income derived and expenses incurred by the Company relating to the aforementioned subsidiaries are consolidated for accounting purposes with the income and expenses of the Company in the consolidated financial statements in this Form 10-KSB. The Company's executive offices are located in a leased facility at 2841 Cypress Creek Road, Fort Lauderdale, Florida 33309 and its telephone number at such address is (954) 974-9003. Corporate Reorganization As noted in Note 6 to the consolidated financial statements, on November 4, 1985, the Company, not including any of its subsidiaries, filed a Voluntary Petition in the United States Bankruptcy Court for the Southern District of Florida seeking to reorganize under Chapter 11 of the Federal Bankruptcy Code. The primary purposes of the petition were (1)to reject leases which were significantly above market rates and (2)to reject leases on closed units which had been repossessed by, or returned to the 4 Company. On May 5, 1987, the Company's Plan of Reorganization as amended and modified was confirmed by the Bankruptcy Court. On December 28, 1997 the Company was officially discharged from bankruptcy. See Note 6 to the consolidated financial statements for a discussion of the bankruptcy proceedings to date and Item 7 for a discussion of the effect of the bankruptcy proceedings herein. Financial Information Concerning Industry Segments The Company's business is carried out principally in two segments: the restaurant segment and the package liquor store segment. Financial information broken into these two principal industry segments for the two fiscal years ended October 2, 1999 and October 3, 1998 is set forth in the consolidated financial statements which are attached hereto, and is incorporated herein by reference. The Company's Package Liquor Stores and Restaurants The Company's package liquor stores are operated under the "Big Daddy's Liquors" servicemark and the Company's restaurants are operated under the "Flanigan's Seafood Bar and Grill" servicemark. The Company's package liquor stores emphasize high volume business by providing customers with a wide selection of brand name and private label liquors, beer and wines. The Company has a policy of meeting the published sales prices of its competitors. The Company provides extensive sales training to its package liquor store personnel. All package liquor stores are open six or seven days a week from 9:00-10:00 a.m. to 9:00-10:00 p.m., depending upon demand and local law. Approximately half of the Company's units have "night windows" with extended evening hours. The Company's restaurants offer full food and alcoholic beverage service with approximately 79.7% of their sales being food items. These restaurants are operated under the "Flanigan's Seafood Bar and Grill" servicemark. Although these restaurants provide a neighborhood atmosphere, they have the degree of standardization prevalent in casual dining restaurant chains, including menu. The interior decor is nautical with numerous fishing and boating pictures and decorations. Drink prices may vary between locations to meet local conditions. Food prices are standardized. The restaurants' hours of operation are from 11:00 a.m. to 1:00-5:00 a.m. The Company continues to develop strong customer recognition of its "Flanigan's Seafood Bar and Grill" servicemark through very competitive pricing and efficient and friendly service. The Company's package liquor stores and restaurants were designed to permit minor modifications without significant capital expenditures. However, from time to time the Company is required to redesign and refurbish its units at significant cost. See Item 2, Properties and Item 7 for further discussion. 5 Franchised Package Liquor Stores and Lounges In March 1985, the Company's Board of Directors approved a plan to sell, on a franchise basis, up to 26 of the Company's package liquor stores and lounges in the South Florida area. Under the terms of the franchise plan, the Company sold the liquor license, furniture, fixtures and equipment of a particular unit, entered into a sublease for the business premises and a franchise agreement, whereby the franchisee licensed the "Big Daddy's Liquors" and "Big Daddy's Lounges" servicemarks in the operation of its business. Investors purchasing units were required to execute ten year franchise agreements with a thirty day cancellation provision. The franchise agreement also provided for a royalty to the Company, in the amount of 1% of gross sales, plus a contribution to advertising, in an amount between 1-1/2% to 2% of gross sales. In most cases, the sublease agreement provided for rent in excess of the amount paid by the Company, in order to realize an additional return of between 2% to 3% of gross sales, depending on a number of factors, including but not limited to the performance of the particular unit sold and its expected sales growth. As of the end of fiscal year 1986, ten units had been franchised. Four of these units were franchised to members of the family of the Chairman of the Board. The Company had limited response to its franchise offering and suspended its franchise plan at the end of fiscal year 1986. During fiscal year 1988, two franchisees (one of whom is on the Company's Board of Directors) exercised the thirty day cancellation clause under the franchise agreement and related documents and returned their franchised units to the Company. No gain or loss was recognized on these returns. The Company has been profitably operating these two units. During fiscal year 1990, the Company completed a foreclosure to take one franchise back, reducing the number of franchised units to seven. This unit was sold pursuant to a private offering to a Subchapter S corporation whose president was the Chairman and whose investors included three directors and members of the Chairman's family. This unit was managed by the Company through the end of fiscal year 1992. In the first quarter of fiscal year 1993, the Board of Directors agreed to purchase this unit from the group of investors. In purchasing this unit, the Board of Directors determined that the projected profitability would provide a fair return on investment, whereas without this purchase, the Company would only have received its 4% management fee until the Subchapter S corporation received its full investment back from this unit. During fiscal year 1991, the Company sold one unit to the unit's manager, an unaffiliated third party, who had been operating it pursuant to a management agreement since 1987. This unit consisted of a package liquor store and restaurant, which restaurant was not 6 operating under the Company's "Flanigan's Seafood Bar and Grill" servicemark. The Company also entered into a franchise agreement with the manager, licensing the use of the "Big Daddy's Liquors" servicemark for the liquor package store in exchange for a royalty in the amount of 1% of gross sales. Although the Company counted this unit as a franchise, the Company did not consider this transaction a part of its franchise plan. During fiscal year 1995, the manager executed the Company's new franchise agreement for the operation of his restaurant under the "Flanigan's Seafood Bar and Grill" servicemark as more fully described below. At the same time, the former manager also executed a new franchise agreement for a second restaurant opened since the purchase of the unit from the Company during fiscal year 1991. During fiscal year 1992, one unaffiliated franchisee expressed an interest in selling his unit or returning it to the Company pursuant to the terms of the franchise agreement and documents. As a result of the substantial investment necessary to upgrade and renovate this unit, an affiliated group of investors formed a Subchapter S Corporation and purchased the unit from the franchisee. The shareholder interest of all the officers and directors represented 42% of the invested capital. The shareholder interest of the Chairman's family represented an additional 47.5% of the total invested capital. The Company continues to receive the same royalties, rent and mortgage payments as it had from the unaffiliated franchisee. During fiscal year 1996, one franchisee exercised the thirty day cancellation clause under the franchise agreement and related documents and returned its franchised unit to the Company. The franchisee had operated a package liquor store and lounge under the "Big Daddy's" servicemark. The Company profitably operated the package liquor store of the franchised unit but did not reopen the lounge. The lease agreement for the business premises expired on December 31, 1995 and the Company occupied the same on an oral month to month lease agreement paying its prorata share of the real property taxes monthly and insuring the property until April 1998 when the oral month to month lease agreement was terminated and the package liquor store was closed. During the third quarter of fiscal year 1996, another unaffiliated franchisee expressed its intent to terminate its new franchise agreement (package liquor store only) and to return its unit, including restaurant to the Company. In order to induce the franchisee to continue operating its franchise through the end of fiscal year 1996, the Company agreed to reduce the weekly sublease rent and suspend all weekly payments on account of its purchase money chattel mortgage. In the interim, the Company determined that the cost necessary to convert this unit to a "Flanigan's Seafood Bar and Grill" restaurant exceeded the funds available to the Company and on September 30, 1996, during the first quarter of fiscal year 1997, the franchise was sold to a related party, in 7 lieu of its return to the Company. The initial shareholder interest of all officers and directors, which was comprised of the Chairman and a member of his family, represented one hundred percent of the initial invested capital. It was also agreed that the Company would manage the franchise for the related third party, pursuant to a management agreement. Subsequent to the closing of the sale of the franchise, another related franchisee, who is also a member of the Board of Directors of the Company, paid the Company the sum of $150,000 to approve his purchase of this franchise from the related third party and for the Company to relinquish its right to act as manager of the franchise. As a part of this transaction, the Company agreed to continue the reduced sublease rent, the waiver of any franchise royalties and the suspension of mortgage payments through March 1997. Since April 1, 1997 the Company has received the same weekly payment as previously paid by the former franchisee during fiscal year 1996. During the third quarter of fiscal year 1997 this related party formed a limited partnership to own this franchise and through which it raised the necessary funds to renovate the restaurant. The Company is an investor in the franchise, as are other related parties, including, but not limited to officers and directors of the Company and their families. During the first quarter of fiscal year 1999, the manager of a franchise restaurant expressed an interest in selling his rights under a Management Agreement and effective December 1, 1998 the Company assumed management of its franchised restaurant. The franchise includes a package liquor store, which is still operated exclusively by the franchisee. The Company retains its interest in the franchise and continues to receive the same royalties and rent as it received prior to its purchase of the right to manage the franchised restaurant. The units that continue to be franchised are doing well and continue to generate income for the Company. Many of the units that were originally offered as franchises have been sold outright and are no longer being operated as Flanigan's or Big Daddy's stores. Franchised Restaurants During fiscal year 1995, the Company completed its new franchise agreement for a franchisee to operate a restaurant under the "Flanigan's Seafood Bar and Grill" servicemark pursuant to a license from the Company. The new franchise agreement was drafted jointly with existing franchisees with all modifications requested by the franchisees incorporated therein. The new franchise agreement provides the Company with the ability to maintain a high level of food quality and service at its franchised restaurants, which are essential to a successful franchise operation. A franchisee is required to execute a new franchise agreement for the balance of the term of its lease for the business premises, extended by the franchisee's continued occupancy of the business 8 premises thereafter, whether by lease or ownership. The new franchise agreement provides for a royalty to the Company in the amount of approximately 3% of gross sales plus a contribution to advertising in an amount between 1-1/2% to 3% of gross sales. In most cases, the Company does not sublease the business premises to the franchisee and in those cases where it does, the Company no longer receives rent in excess of the amount paid by the Company. As the end of fiscal year 1998, all existing franchisees who operate restaurants under the "Flanigan's Seafood Bar and Grill" or other authorized servicemarks had executed new franchise agreements. During fiscal year 1996, the Company's franchise agreement with a member of Mr. Flanigan's family expired and the Company declined to offer the franchisee the option of executing its new franchise agreement. During the first quarter of the fiscal year 1997, the Company filed suit against the franchisee for servicemark infringement, seeking injunctive relief and monetary damages. During the first quarter of fiscal year 1998, a Stipulated Agreed Order of Dismissal Upon Mediation was issued whereby the Company received $110,000 and the former franchisee agreed to cease all use of the "Flanigan's" servicemark and other trade dress features common to Company owned and/or franchised restaurants. Investment in Joint Ventures During the first quarter of fiscal year 1996, the Company began operating a restaurant under the "Flanigan's Seafood Bar and Grill" servicemark as general partner and fifty percent owner of a limited partnership established for such purpose. The limited partnership agreement gives the limited partnership the right to use the "Flanigan's Seafood Bar and Grill" servicemark only while the Company acts as general partner. As previously discussed, during the third quarter of fiscal year 1997, a related party formed a limited partnership to own a certain franchise in Fort Lauderdale, Florida, through which it raised the necessary funds to renovate the restaurant. The Company is a twenty five percent owner of the limited partnership as are other related parties, including, but not limited to officers and directors of the Company and their families. During the fourth quarter of fiscal year 1997, the Company formed a limited partnership and raised funds through a private offering to purchase the assets of a restaurant in Surfside, Florida and renovate the same for operation under the "Flanigan's Seafood Bar and Grill" servicemark. The Company acts as general partner of the limited partnership and is also a forty two percent owner of the same, as are other related parties, including, but not limited to officers and directors of the Company and their families. The limited partnership agreement gives the limited 9 partnership the right to use the "Flanigan's Seafood Bar and Grill" servicemark for a fee equal to 3% of the gross sales from the operation of the restaurant, only while the Company acts as general partner. This restaurant opened in the second quarter of fiscal year 1998. In order to ensure that the Company had adequate cash reserves in view of its investment in the restaurant discussed above, and for other improvements, during the second quarter of fiscal year 1997, the Board of Directors authorized the Company to borrow up to $1,200,000 at an interest rate of twelve percent (12%) per annum and fully amortized over five (5) years. During the fourth quarter of fiscal year 1997, the Company borrowed $375,000 from private investors, in units of $5,000, which loan is fully secured with specific receivables owned by the Company. During the first quarter of fiscal year 1998, the Company closed on its loan from Nations Bank (formerly Barnett Bank) in the principal amount of $500,000 with interest at prime rate. Equal quarterly principal payments began March 31, 1998 with interest payable monthly. The Company prepaid the loan in full during the third quarter of fiscal year 1999. In the third quarter of fiscal year 1998, the Company entered into a lease agreement for a restaurant in Kendall, Florida and a separate agreement for the purchase of the furniture, fixtures and equipment of the existing restaurant. The lease agreement and separate agreement were each contingent upon the Company applying for and receiving zoning variances from Miami Dade County, Florida. Although zoning variances became final during the first quarter of fiscal year 1999, for reasons beyond the control of the Company, building permits were not issued until September 1999 at which time the renovations commenced. The restaurant is expected to open during the second quarter of fiscal year 2000. At the same time, the Company raised funds through a private offering for a limited partnership to be formed, to own and renovate the restaurant for operation of the same under the "Flanigan's Seafood Bar and Grill" servicemark. The Company is general partner of the limited partnership and is the owner of forty percent of the same, as well as other related parties, including but not limited to officers and directors of the Company and their families. The limited partnership agreement will give the partnership the right to use the "Flanigan's Seafood Bar and Grill" servicemark for a fee equal to 3% of the gross sales from the operation of the restaurant, while the Company acts as general partner only. Clubs As of the end of fiscal year 1999, the Company owned one club in Atlanta, Georgia, which was operated by an unaffiliated third party, as discussed below. In addition, until September 20, 1996, the Company operated its remaining Pennsylvania club, (Store #850, King of Prussia, Pennsylvania), which was financed through a 10 limited partnership in which a wholly owned subsidiary of the Company acted as general partner. The lease for this unit had only thirteen months remaining, with no more renewal options, and revenues were down as a result of competition from some expensive new clubs constructed on the waterfront. An opportunity arose to sell the lease, leasehold improvements and liquor license to Dick Clark Restaurants, Inc. With the approval of the limited partners, the sale of the unit was consummated on September 20, 1996 for a purchase price of $500,000. Operation of Units by Unaffiliated Third Parties During fiscal year 1992, the Company entered into a Management Agreement with Mardi Gras Management, Inc. for the operation of the Company's club in Atlanta, Georgia through the balance of the initial term of the lease, unless sooner terminated by Mardi Gras Management, Inc. upon thirty days prior written notice, with or without cause. Mardi Gras Management, Inc. assumed the management of this club effective November 1, 1991 and is currently operating the club under an adult entertainment format. During fiscal year 1997, the Company agreed to modify the Management Agreement to give Mardi Gras Management, Inc. one five year renewal option to extend the term of the same provided the Company is satisfied with the financial condition of Mardi Gras Management, Inc. within its sole discretion, and Mardi Gras Management, Inc. agreed to modify the owner's fee to $150,000 per year versus ten percent of gross sales from the club, whichever is greater. Pursuant to the Management Agreement, as modified, the Company receives a monthly owner's fee of $12,500, subject to adjustment each year on or about July 1, with an additional equal to 10% of the gross sales exceeding $1,500,000 for the prior 12 month period, being due the Company. Operations and Management The Company emphasizes systematic operations and control of all units. Each unit has its own manager who is responsible for monitoring inventory levels, supervising sales personnel, food preparation and service in restaurants and generally assuring that the unit is managed in accordance with Company guidelines and procedures. The Company has in effect an incentive cash bonus program for its managers and salespersons based upon various performance criteria. The Company's operations are supervised by area supervisors. Each area supervisor supervises the operations of the units within his or her territory and visits those units to provide on-site management and support. There are three area supervisors responsible for package store, restaurant and club operations in specific geographic districts. All of the Company's managers and salespersons receive extensive training in sales techniques. 11 The Company arranges for independent third parties, or "shoppers", to inspect each unit in order to evaluate the unit's operations, including the handling of cash transactions. Purchasing and Inventory The package liquor business requires a constant substantial capital investment in inventory in the units. Liquor inventory purchased can normally be returned only if defective or broken. All Company purchases of liquor inventory are made through its purchasing department from the Company's corporate headquarters. The major portion of inventory is purchased under individual purchase orders with licensed wholesalers and distributors who deliver the merchandise within one or two days of the placing of an order. Frequently there is only one wholesaler in the immediate marketing area with an exclusive distributorship of certain liquor product lines. Substantially all of the Company's liquor inventory is shipped by the wholesalers or distributors directly to the Company's units. The Company significantly increases its inventory prior to Christmas, New Year's eve and other holidays. Pursuant to Florida law, the Company pays for its liquor purchases within ten days of delivery. All negotiations with food suppliers are handled by the Company's purchasing department at the Company's corporate headquarters. This ensures that the best quality and prices will be available to each unit. Orders for food products are prepared by each unit's kitchen manager and reviewed by the unit's general manager before being placed with the approved vendor. Merchandise is delivered by the supplier directly to each unit. Orders are placed several times a week to ensure product freshness. Food inventory is primarily paid for monthly. Government Regulation The Company is subject to various federal, state and local laws affecting its business. In particular, the units operated by the Company are subject to licensing and regulation by the alcoholic beverage control, health, sanitation, safety and fire department agencies in the state or municipality where located. Alcoholic beverage control regulations require each of the Company's units to apply to a state authority and, in certain locations, county and municipal authorities, for a license or permit to sell alcoholic beverages on the premises. In the State of Florida, which represents all but one of the total liquor licenses held by the Company, most of the Company's liquor licenses are issued on a "quota License" basis. 12 Quota licenses are issued on the basis of a population count established from time to time under the latest applicable census. Because the total number of liquor licenses available under a quota license system is limited, the licenses have purchase and resale value based upon supply and demand in the particular areas in which they are issued. The quota licenses held by the Company allow the sale of liquor for on premises consumption only. In Florida, the other liquor licenses held by the Company or limited partnerships of which the Company is the general partner are restaurant liquor licenses, which do not have quota restrictions and no purchase or resale value. A restaurant liquor license is issued to every applicant who meets all of the state and local licensing requirements, including, but not limited to zoning and minimum restaurant size, seating and menu. In the State of Georgia, the other state in which the Company operates, licensed establishments also do not have quota restrictions for on-premises consumption and such licenses are issued to any applicant who meets all of the state and local licensing requirements based upon extensive license application filings and investigations of the applicant. All licenses must be renewed annually and may be revoked or suspended for cause at any time. Suspension or revocation may result from violation by the licensee or its employees of any federal, state or local law regulation pertaining to alcoholic beverage control. Alcoholic beverage control regulations relate to numerous aspects of the daily operations of the Company's units, including, minimum age of patrons and employees, hours of operations advertising, wholesale purchasing, inventory control, handling, storage and dispensing of alcoholic beverages, internal control and accounting and collection of state alcoholic beverage taxes. As the sale of alcoholic beverages constitutes a large share of the Company's revenue, the failure to receive or retain, or a delay in obtaining a liquor license in a particular location could adversely affect the Company's operations in that location and could impair the Company's ability to obtain licenses elsewhere. The Company is subject in certain states to "dram shop" or "liquor liability" statutes, which generally provide a person injured by an intoxicated person the right to recover damages from an establishment that wrongfully served alcoholic beverages to such person. See Item 1, Insurance and Item 3, Legal Proceedings for further discussion. The Company maintains a continuous program of training and surveillance from its corporate headquarters to assure compliance with all applicable liquor laws and regulations. During the fourth quarter of fiscal year 1997, the Division of Alcoholic Beverages and Tobacco (DABT), subpoenaed several employees of the Company to inquire about three cash purchases of inventory made in calendar years 1995 and 1996 from a distributor, without invoices. 13 The total purchase price for the inventory was $5,100. The Company was charged administratively by the DABT for failing to have invoices for these cash transactions, but subsequent to the end of fiscal year 1998, the Company entered in a settlement agreement with the DABT and paid a fine of $4,000. At its meeting on September 4, 1997,the Board of Directors was advised of the investigation by the DABT and unanimously passed a resolution prohibiting management from purchasing inventory without an invoice and in cash. Otherwise, during the fiscal years ended October 3, 1998, and October 2, 1999, and through the present time, no significant pending matters have been initiated by the DABT concerning any of the Company's licenses which might be expected to result in a revocation of a liquor license or other significant actions against the Company, The Company is not aware of any statute, ordinance, rule or regulation under present consideration which would significantly limit or restrict its business as now conducted. However, in view of the number of jurisdictions in which the Company does business, and the highly regulated nature of the liquor business, there can be no assurance that additional limitations may not be imposed in the future, even though none are presently anticipated. Federal and state environmental regulations have not had a material effect on the Company's operation. Insurance The Company has general liability insurance which incorporates a semi-self-insured plan under which the Company assumes the full risk of the first $50,000 of exposure per occurrence. The Company's insurance carrier is responsible for $1,000,000 coverage per occurrence above the Company's self-insured deductible, up to a maximum aggregate of $2,000,000 per year. The Company is self-insured against liability claims in excess of $1,000,000. The Company's general policy is to settle only those legitimate and reasonable claims asserted and to aggressively defend and go to trial, if necessary, on frivolous and unreasonable claims. The Company has established a select group of defense attorneys which it uses in conjunction with this program. Under the Company's current liability insurance policy, any expense incurred by the Company in defending a claim, including adjusters and attorney's fees, are a part of the $50,000 self-insured retention. An accrual for the Company's estimated liability on liability claims is included in the consolidated balance sheets in the caption "Accrued and Other Liabilities". A significant unfavorable judgment or settlement against the Company in excess of its liability insurance coverage could have a materially adverse effect on the Company. 14 Through the end of the 1990 fiscal year, the Company was uninsured for dram shop liability. Florida has restricted its dram shop law by statute, permitting persons injured by an "obviously intoxicated person" to bring a civil action against the business which served alcoholic beverages to a minor or an individual known to be habitually addicted to alcohol. Dram shop claims normally involve traffic accidents and the Company generally does not learn of dram shop claims until after a claim is filed and the Company then vigorously defends these claims on the grounds that its employees did not serve an "obviously intoxicated person". Damages in most dram shop claims are substantial. At the present time, there are no dram shop claims pending against the Company. Competition and the Company's Market The liquor and hospitality industries are highly competitive and are often affected by changes in taste and entertainment trends among the public, by local, national and economic conditions affecting spending habits, and by population and traffic patterns. The Company believes that the principal means of competition among package liquor stores is price and that, in general, the principal means of competition among restaurants include location, type and quality of facilities and type, quality and price of beverage and food served. The Company's package liquor stores compete directly or indirectly with local retailers and discount "superstores". Due to the competitive nature of the liquor industry in South Florida, the Company has had to adjust its pricing to stay competitive, including meeting all competitor's advertisements. Such practices will continue in the package liquor business. It is the opinion of the Company's management that the Company has a competitive position in its market because of widespread consumer recognition of the "Big Daddy's" and "Flanigan's" names. As previously noted, at October 2, 1999 the Company owned and operated eight restaurants, six of which had formerly been lounges and were renovated to provide full food service. These restaurants compete directly with other restaurants serving liquor in the area. The Company's restaurants are competitive due to four factors; product quality, portion size, moderate pricing and a standardization throughout the Company owned restaurants and most of the franchises. The Company's business is subject to seasonal effects, in that liquor purchases tend to increase during the holiday seasons. Trade Names The Company operates principally under three servicemarks; "Flanigan's", "Big Daddy's", and "Flanigan's Seafood Bar and Grill". Throughout Florida the Company's package liquor stores are 15 operated under the "Big Daddy's Liquors" servicemark. The Company's rights to the use of the "Big Daddy's" servicemark are set forth under a consent decree of a Federal Court entered into by the Company in settlement of federal trademark litigation. The consent decree and the settlement agreement allow the Company to continue, and expand, its use of the "Big Daddy's "servicemark in connection with limited food and liquor sales in Florida. The consent decree further contained a restriction upon all future sales of distilled spirits in Florida under the "Big Daddy's" name by the other party who has a federally registered servicemark for "Big Daddy's" use in the restaurant business. The Federal Court retained jurisdiction to enforce the consent decree. The Company has acquired a registered Federal trademark on the principal register for its "Flanigan's" servicemark. During fiscal year 1996, the Company's franchise agreement with a member of Mr. Flanigan's family expired and the Company declined to offer the franchisee the option of executing its new franchise agreement. During the first quarter of fiscal year 1997, the Company filed suit against the franchisee for servicemark infringement, seeking injunctive relief and monetary damages. During the first quarter of fiscal year 1998, a Stipulated Agreed Order of Dismissal Upon Mediation was issued whereby the Company received $110,000 and the former franchisee agreed to cease all use of the "Flanigan's" servicemark and other dress features common to the Company owned and/or franchised restaurants. The standard symbolic trademark associated with the Company and its facilities is the bearded face and head of "Big Daddy" which is predominantly displayed at all "Flanigan's" facilities and all "Big Daddy's" facilities throughout the country. The face comprising this trademark is that of the Company's founder, Joseph "Big Daddy" Flanigan, and is a federally registered trademark owned by the Company. Employees As of year end, the Company employed 368 employees, of which 298 were full-time and 70 were part-time. Of these, 23 were employed at the corporate offices. Of the remaining employees, 38 were employed in package liquor stores and 307 in restaurants. None of the Company's employees are represented by collective bargaining organizations. The Company considers its labor relations to be favorable. 16 EXECUTIVE OFFICERS OF THE REGISTRANT Positions and Offices Office or Position Name Currently Held Age Held Since ---- -------------- --- ---------- Joseph G. Flanigan Chairman of the Board 70 1959 of Directors, Chief Executive Officer and President William Patton Vice President 76 1975 Community Relations Edward A. Doxey Chief Financial Officer 58 1992 and Secretary Jeffrey D. Kastner Assistant Secretary 46 1995 Item 2. Properties The Company's operations are all conducted on leased property. Initially most of these properties were leased by the Company on long-term ground and building leases with the buildings either constructed by the lessors under build-to-suit leases or constructed by the Company. A relatively small number of business locations involve the lease or acquisition of existing buildings. In almost every instance where the Company initially owned the land or building on leased property, the Company entered into a sale and lease-back transaction with investors to recover a substantial portion of its per unit investment. The majority of the Company's leases contained rent escalation clauses based upon the consumer price index which made the continued profitable operation of many of these locations impossible and jeopardized the financial position of the Company. As a result of the Company's inability to renegotiate these leases, on November 4, 1985 the Company, not including its subsidiaries, filed a Voluntary Petition in the United States Bankruptcy Court for the Southern District of Florida seeking to reorganize under Chapter 11 of the Federal Bankruptcy Code. The primary purpose of the reorganization was to reject and/or renegotiate the leases on such properties. On January 11, 1986, the Bankruptcy Court entered its Order granting the Company's motions to reject thirteen leases and the Company was successful in negotiating a termination of three other leases. On April 7, 1986, the Bankruptcy Court granted the Company's motion to reject two additional leases and two more 17 leases were rejected by the Company's failure to assume the same by May 22, 1986. In addition, during the pendency of the bankruptcy proceedings, the Company was successful in renegotiating a substantial number of the Company's remaining leases, generally amending the terms to five years with three five year renewal options and deleting cost of living rental adjustments in exchange for rents based upon the "fair market rental" for each particular location. The Company believes that the units retained, especially with the aforementioned lease modifications, are adequate to support its operations, including any damages as a result of its bankruptcy proceedings. All of the Company's units require periodic refurbishing in order to remain competitive. The Company has budgeted $432,000 for its refurbishing program for fiscal year 2000. See Item 7, "Liquidity and Capital Resources" for discussion of the amounts spent in fiscal year 1999. The following table summarizes the Company's properties as of October 2, 1999 including franchise locations, a club and Company managed locations. Square License Lease Name and Location Footage Seats Owned by Terms - ----------------- ------- ----- -------- ----- Big Daddy's Liquors #8 1,800 N/A Company 5/1/99 to 4/30/14 Flanigan's Enterprises Inc. 959 State Road 84 Fort Lauderdale, FL Flanigan's Seafood Bar 4,300 130 Company 10/1/71 to 12/31/04 and Grill #9 and Option to Flanigan's Enterprises 12/31/09 Inc. (2) 1550 W.84th Street Hialeah, FL Flanigan's Legends 5,000 150 Franchise 5/15/97 Seafood Bar and Grill 5/14/00 #11, 11 Corporation (3) 330 Southern Blvd. W. Palm Beach, FL Flanigan's Legends 5,000 180 Franchise 11/15/92 to Seafood Bar and Grill 11/15/02 #12 Galeon Tavern, Inc. (3) Option to 2401 Tenth Ave. North 11/15/12 Lake Worth, FL 18 Square License Lease Name and Location Footage Seats Owned by Terms - ----------------- ------- ----- -------- ----- Flanigan's Seafood 5,000 200 Joint N/A Bar & Grill #13 Venture CIC Investors #13 Ltd. 1549 NW LeJeune Rd Miami, FL Flanigan's Seafood 3,320 90 Franchise 6/1/79 to 6/1/04 Bar and Grill #14, Option to 6/1/09 Big Daddy's #14, Inc. (2)(3)(5)(10) 2041 NE Second St. Deerfield Beach, FL Piranha Pats II-#15 4,000 90 Franchise 3/2/76 to 8/31/01 CIC Investors #15 Ltd. (3)(5) Options to 8/31/11 1479 E. Commercial Blvd. Ft. Lauderdale, FL Flanigan's Seafood 4,300 100 Franchise 2/15/72 to 12/31/00 Bar and Grill #18 Options to 12/31/10 Twenty Seven Birds Corp. (2)(3)(5) 2721 Bird Avenue Miami, FL Flanigan's Seafood 4,500 160 Company 3/1/72 to 12/31/00 Bar and Grill #19 Option to 12/31/05 Flanigan's Enterprises Inc. (2)(4) 2505 N. University Dr. Hollywood, FL Flanigan's Seafood 5,100 140 Company 7/15/68 to 12/31/00 Bar and Grill #20 Options to 12/31/05 Flanigan's Enterprises Additional Lease Inc. (2) 5/1/69 to 12/31/00 North Miami, FL Options to 12/31/05 Flanigan's Seafood 4,100 200 Company 12/16/68 to Bar and Grill #22 12/31/00 Flanigan's Enterprises Options to 12/31/10 Inc. (2)(4) 2600 W. Davie Blvd. Ft. Lauderdale, FL Flanigan's Enterprises 3,000 90 Company 7/1/50 to 6/30/49 Inc. #27 (9) 732-734 NE 125th St. North Miami, FL 19 Square License Lease Name and Location Footage Seats Owned by Terms - ----------------- ------- ----- -------- ----- Flanigan's Seafood 4,600 150 Company 9/6/68 to 12/31/00 Bar and Grill #31 Options to 12/31/10 Flanigan's Enterprises Inc. (2) 4 N. Federal Highway Hallandale, FL Flanigan's Guppy's 4,620 130 Franchise 11/1/68 to 10/31/03 Seafood Bar and Grill #33 New Lease Guppies, Inc. (2)(3)(5) 11/1/03 to 12/31/09 45 S. Federal Highway Boca Raton, FL Big Daddy's Liquors 3,000 N/A Company 5/29/97 to 5/28/02 #34, Flanigan's Options to 5/28/17 Enterprises, Inc. (1) 9494 Harding Ave. Surfside, FL Big Daddy's Liquors 4,600 N/A Company 3/10/87 to 12/31/00 #36, Flanigan's Additional Lease Enterprises, Inc. (2) 4/29/87 to 12/31/00 102 N. Dixie Highway Option to 12/31/05 Lake Worth, FL Flanigan's Seafood 4,600 140 Company 4/1/71 to 12/31/00 Bar and Grill #40 Option to 12/31/05 Flanigan's Enterprises Inc. (2) 5450 N. State Road 7 Ft. Lauderdale, FL Big Daddy's Liquors 6,000 N/A Company 12/21/68 to 1/1/10 #47, Flanigan's Options to 1/1/60 Enterprises, Inc. (6)(8) 8600 Biscayne Blvd. Miami, FL Flanigan's Seafood 6,800 200 Joint 8/1/97 to 12/31/11 Bar and Grill #60, Venture CIC Investors #60 Ltd. 9516 Harding Avenue Surfside, FL Flanigan's Seafood 4,850 161 Joint 4/1/98 to 3/31/08 Bar and Grill #70 Venture Options to 3/31/28 12790 SW 88 St Kendall, FL 20 Square License Lease Name and Location Footage Seats Owned by Terms - ----------------- ------- ----- -------- ----- Flanigan's Enterprises 10,000 400 Company 5/1/76 to 4/30/01 #600 (7) Option to 4/30/06 Powers Ferry Landing Atlanta, GA (1) License subject to chattel mortgage. (2) License pledged to secure lease rental. (3) Franchised by Company. (4) Former franchised unit returned and now operated by Company. (5) Lease assigned to franchisee. (6) Lease originally assigned to unaffiliated third parties. During fiscal year 1996, the Company purchased 37% of the leasehold interest from the unaffiliated third parties. An additional 11% was purchased during fiscal year 1997, bringing the total interest purchased to 48%. (7) Location managed by an unaffiliated third party. (8) Business formerly operated by the Company pursuant to Court Order, until December 31, 1996 when the Company reacquired ownership of the business through foreclosure. (9) Location was closed in May 1998. The Company entered into a five year sub-lease agreement, with two five year options, with an unaffiliated third party who is presently operating a restaurant at this location. (10) Effective December 1, 1998, the Company purchased the Management Agreement to operate the franchised restaurant for the franchisee. Item 3. Legal Proceedings. Due to the nature of the business, the Company is sued from time to time by patrons, usually for alleged personal injuries occurring at the Company's business locations. The Company has liability insurance which incorporates a semi-self-insured plan under which the Company assumes the full risk of the first $50,000 of exposure per occurrence. The Company's insurance carrier is responsible for $1,000,000 coverage per occurrence above the Company's self-insured deductible, up to a maximum aggregate of $2,000,000 per year. Certain states have liquor liability (dram shop) laws which allow a person injured by an "obviously intoxicated person" to bring a civil suit against the business (or social host) who had served 21 intoxicating liquors to an already "obviously intoxicated person". The Company's insurance coverage relating to this type of incident is limited. Through the end of the 1990 fiscal year, the Company was uninsured for dram shop liability. Florida has restricted its dram shop by statute, permitting persons injured by an "obviously intoxicated person" to bring a civil action against the business which had served alcoholic beverages to a minor or to an individual known to be habitually addicted to alcohol. Dram shop claims normally involve traffic accidents and the Company generally does not learn of dram shop claims until after a claim is filed and then the Company vigorously defends these claims on the grounds that its employee did not serve an "obviously intoxicated person". Damages in most dram shop cases are substantial. At the present time, there are no dram shop cases pending against the Company. On November 4, 1985 the Company, not including its subsidiaries, filed a Voluntary Petition in the United States Bankruptcy Court for the Southern District of Florida seeking to reorganize under Chapter 11 of the Federal Bankruptcy Code. The Petition, identified as case no. 85-02594-BKC-AJC was filed in Fort Lauderdale, Florida. By Order of the Court dated November 4, 1985, the Company was appointed "debtor in possession". The Company's action was a result of significant escalations of rent on certain of the Company's leases which made continued profitable operations at those locations impossible and jeopardized the Company's financial position. The major purpose of the reorganization was to reject such leases. On January 11, 1986, the Bankruptcy Court granted the Company's motions to reject thirteen leases and the Company was successful in negotiating the termination of three additional leases. On April 7, 1986, the Bankruptcy Court granted the Company's motion to reject two additional leases and two more leases were automatically rejected due to the Company's failure to assume the same prior to May 22, 1986. During the fiscal year ended October 3, 1987 the Company negotiated a formula with the Official Committee of Unsecured Creditors ("Committee"), which formula was used to calculate lease rejection damages under the Company's Amended Plan of Reorganization. Stipulations were filed by the Company with all but three of these unsecured creditors, which stipulations received Bankruptcy Court approval prior to the hearing on confirmation. In addition to the rejection of leases, the Company also sought its release from lease agreements for businesses sold, which sales included the assignment of the leases for the business premises. While several landlords whose leases had been assigned did file claims against the Company, the majority did not, which resulted in the Company being released from its guarantees under those leases. The Company was also successful in negotiating the limitation or release of lease guarantees of those landlords who filed claims, 22 which settlements received Bankruptcy Court approval prior to the hearing on confirmation. On February 5, 1987, the Company filed its Amended Plan of Reorganization and Amended Disclosure Statement, which documents were approved by the Committee. On February 25, 1987, the Company further modified its Amended Plan of Reorganization to secure the claims of Class 6 Creditors (Lease Rejection) and Class 8 Creditors (Lease Guarantee Rejections). The Bankruptcy Court approved the Amended Disclosure Statement by Order dated March 7, 1987 and scheduled the hearing to consider confirmation of the Amended Plan of Reorganization on April 13, 1987. On April 10, 1987, in order to insure receipt of the necessary votes to approve its Amended Plan of Reorganization, the Company agreed to further modification of its Amended Plan, whereby creditors of Class 6 and 8 will receive $813,000 prorata as additional damages under the terms of the Amended Plan. On April 13, 1987, the Company's Amended Plan of Reorganization was confirmed and the Bankruptcy Court entered its Order of Confirmation on May 5, 1987. Pursuant to the terms of the Amended Plan of Reorganization, the Effective Date of the same was June 30, 1987. As of that date, confirmation payments totaling $1,171,925 were made by the Company's Disbursing Agent with $647,226 being retained in escrow for disputed claims ($1,819,151 total). The Bankruptcy Court ratified the disbursements made by the Disbursing Agent by its Order dated December 21, 1987. On December 28, 1987, the Bankruptcy Court entered its Notice of Discharge of the Company. During fiscal year 1991 and again during fiscal year 1992, the Company and Class 6 and Class 8 Creditors under the Company's Amended Plan of Reorganization modified the schedule for the payment of bankruptcy damages, reducing the amount of the quarterly payments by extending the term of the same, but without reducing the total amount of bankruptcy damages. The modification to the payment schedule provided the Company with needed capital. Item 4. Submission of matters to a Vote of Security Holders. During the fourth quarter of fiscal year 1999 the Company did not submit any matter to a vote of the security holders. 23 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. RANGE OF PER SHARE MARKET PRICES ADJUSTED FOR 2 FOR 1 STOCK SPLIT PAID APRIL 1, 1999 Fiscal 1999 Fiscal 1998 ----------- ----------- High Low High Low ---- --- ---- --- First quarter 5-1/8 3-5/8 6-3/8 3-11/16 Second quarter 8 4-3/16 6-3/4 3-9/16 Third quarter 6-7/8 3-3/4 6-5/8 5-3/8 Fourth quarter 5-3/8 4-1/8 5-11/16 4-1/8 On December 10, 1998 the Company declared a cash dividend of 20 cents per share (pre split shares) payable February 1, 1999 to shareholders of record on January 4, 1999. On February 26, 1999 the Company declared a two for one stock split payable April 1, 1999 to shareholders of record on March 17, 1999. Item 6. Selected Financial Data. Not required Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. At October 3, 1998, the Company was operating thirteen units. The Company had interests in an additional seven units which had been franchised by the Company. Of the units operated by the Company, four were combination package liquor stores and restaurants, five were restaurants only and three were package liquor stores only. There was one club operated by an unaffiliated third party under a management agreement. As compared to fiscal year 1998, as of October 2, 1999, the Company was operating fourteen units. The Company had interests in an additional seven units which had been franchised by the Company. Of the units operated by the Company, four were combination package liquor stores and restaurant, four were restaurants only and four were package liquor stores only. There was one club operated by an unaffiliated third party under a management agreement. During fiscal year 1999, one restaurant only was closed with the expiration of its lease and the liquor license and some of the furniture, fixtures and equipment were sold to an unaffiliated third party. The closing of the restaurant resulted in a $51,000 loss to the Company. During fiscal year 1999 the Company opened 24 one package liquor store only in Fort Lauderdale, Florida, and purchased the Management Agreement of a franchise, which includes the right to manage the franchised restaurant only. Liquidity and Capital Resources Cash Flows The following table is a summary of the Company's cash flows for the fiscal years ended October 2, 1999 and October 3, 1998: Fiscal Years Ended ----------- 1999 1998 ------- ------- (in thousands) Net cash provided by operating activities $ 2,652 $ 1,060 Net cash used in investing activities (1,032) (760) Net cash used in financing activities (1,336) (166) ------ Net increase in cash and equivalents 284 134 Cash and equivalents, beginning of year 1,468 1,334 ------- ------- Cash and equivalents, end of year $ 1,752 $ 1,468 ======= ======= The Year 2000 Issue The Company completed the installation of a Great Plains Accounting Package in fiscal year 1999 to address the year 2000 issue at a cost of $152,000. The system has been tested and is year 2000 compliant. The company incurred consultants fees, in the amount of $113,000, which were expensed during fiscal year 1999. The Company utilizes POSitouch cash registers in its restaurant operations and Omron cash registers in its package liquor operations. The registers record revenues and calculate inventory. Both systems are year 2000 compliant. Improvements Capital expenditures were $934,000 and $808,000 during fiscal years 1999 and 1998, respectively. The capital expenditures were for upgrading existing units serving food, improvements to package liquor stores and the replacement of the corporate computer system. 25 All of the Company's units require periodic refurbishing in order to remain competitive . During fiscal 1992, as cash flow improved, the Company embarked on a refurbishing program which continued through fiscal year 1999. The budget for fiscal year 2000 includes approximately $432,000 for this purpose. The Company expects the monies for these improvements will be provided from operations. Property and Equipment The Company's property and equipment, at cost, less accumulated depreciation and amortization, was $4,004,000 at October 2, 1999 compared to $3,717,000 at October 3, 1998. The Company's liquor licenses less accumulated amortization were $303,000 at October 2, 1999 compared to $358,000 at October 3, 1998. The Company's leased property under capital leases, less accumulated amortization was $ $93,000 at October 2, 1999 compared to $129,000 at October 3, 1998. The Company's leased property under capital leases has continued to decline because any new leases the Company enters into are operating leases, and thus there are no additions to capital leases. Long term debt The Company closed on its $500,000 loan with Nations Bank (formerly Barnett Bank) during the first quarter of 1998 and repaid principal of $125,000 during the fiscal year 1998. The balance of $375,000 was repaid in full during fiscal year 1999. The Company repaid long term debt, including the Nations Bank note payable, capital lease obligations and Chapter 11 bankruptcy damages in the amount of $807,000 and $692,000 in fiscal years 1999 and 1998 respectively. Working capital The table below summarizes the current assets, current liabilities and working capital for the fiscal years 1999 and 1998: Oct. 2 Oct. 3 Item 1999 1998 - ---- ------ ------ Current assets $ 4,075,000 $ 3,456,000 Current liabilities 2,693,000 2,242,000 Working capital 1,382,000 1,214,000 During fiscal year 1991 and again in fiscal year 1992, the Company refinanced existing debt due Class 6 and 8 Creditors under the Company's Amended Plan by extending the payment schedule to the year 2002, thereby reducing the payments from $500,000 per year to $200,000 per year for two years and thereafter to $300,000 per year until paid, but without reducing the total amount of bankruptcy damages. 26 Management believes that positive cash flow from operations will adequately fund operations, debt reductions and planned capital expenditures in fiscal year 2000. The Company's Amended Plan of Reorganization was prepared to allow the Company to meet its obligations from cash generated from operations. The Amended Plan was approved by the majority of the creditors and confirmed by the Bankruptcy Court on May 5, 1987 and the Company was officially discharged from bankruptcy on December 28, 1987. As noted above, during fiscal year 1991 and again in fiscal year 1992, the Class 6 and 8 Creditors agreed to refinance existing debt by extending their payment schedule. See Bankruptcy Proceedings below and Note 6 to the consolidated financial statements. Income Taxes Financial Accounting Standards Board Statement No. 109, Accounting for Income Taxes requires, among other things, recognition of future tax benefits measured at enacted rates attributable to deductible temporary differences between financial statement and income tax bases of assets and liabilities and to tax net operating loss carryforwards to the extent that realization of said benefits is more likely than not. For discussion regarding the Company's net operating loss carryforwards refer to Note 7 to the consolidated financial statements for fiscal year ended October 2, 1999. Bankruptcy Proceedings As noted above and in Note 6 to the consolidated financial statements, on November 4, 1985, Flanigan's Enterprises, Inc., not including any of its subsidiaries, filed a Voluntary Petition in the United States Bankruptcy Court for the Southern District of Florida seeking to reorganize under Chapter 11 of the Federal Bankruptcy Code. The primary purposes of the petition were (1) to reject leases which were significantly above market rates and (2) to reject leases on closed units which had been repossessed by or returned to the Company. During fiscal year 1986 the Company terminated or rejected 34 leases. Many of the leases remaining were renegotiated to five year terms, with three five year renewal options at fair market rental. As was their right under the Bankruptcy Code, the landlords of properties rejected by the Company filed claims for losses or damages sustained as a result of the Company's rejection of such leases. The amount of such damages is limited by federal law. The Company outlined a schedule for payment of these damages in the Amended Plan. As noted above, the Amended Plan was approved in the Bankruptcy Court on May 5, 1987. The gross amount of damages payable to creditors for the rejected leases was $4,278,000. Since the damage payments were to be made over nine 27 years, the total amount due was discounted at a rate of 9.25%. See Note 2 to the consolidated financial statements for the current payment schedule of these damages. Other Legal Matters Through the end of fiscal year 1990, the Company was uninsured for dram shop liability. See pages 12 and 13 for further discussion regarding dram shop suits. During fiscal year 1996, a former employee alleged that her position with the Company was changed due to her pregnancy. The Equal Employment Opportunity Commission failed to make a determination on this claim within one hundred eighty (180) days of its filing and subsequent to the end of fiscal year 1996, this claimant filed suit against the Company. The Company disputed this claim and vigorously defended the same. During the fourth quarter of fiscal year 1997, the former employee's attorney withdrew and during the first quarter of fiscal year 1998 the lawsuit was dismissed due to the failure of the employee to retain substitute counsel. Results of Operations REVENUES (in thousands): Fifty Two Fifty Three Weeks Ended Weeks Ended Sales Oct. 2, 1999 Oct. 3, 1998 - ----- ------------ ------------ Restaurant, food $ 10,708 51.8% $ 10,628 52.0% Restaurant, bar 2,722 13.2% 2,891 14.2% Package goods 7,255 35.0% 6,901 33.8% -------- ----- -------- ----- Total 20,685 100.0% 20,420 100.0% Franchise revenues 894 761 Owners fee 230 173 Joint venture income 341 207 Other operating income 165 206 -------- -------- Total Revenues $ 22,315 $ 21,767 As the table above illustrates, total revenues have increased for the fiscal year ended October 2, 1999 when compared to the fiscal year ended October 3, 1998. During the third quarter of fiscal year 1998 the Company closed its restaurant in North Miami which operated under the "Flanigan's Cafe" servicemark. During the first quarter of fiscal year 1999, the Company entered into a sublease for the property with an unaffiliated third party. 28 During the second quarter of fiscal year 1999, the Company closed a location in Fort Lauderdale at the expiration of the lease. The liquor license and some of the equipment and fixtures were sold to an unaffiliated third party. This closing resulted in a loss of $51,000 to the Company. During the second quarter of fiscal year 1999 the Company entered into a lease for a package liquor store in Fort Lauderdale, FL. The package liquor store opened for business during the third quarter of fiscal year 1999. Restaurant food sales represented 51.8% of total sales in the fifty two weeks ended October 2, 1999 as compared to 52.0% in the fifty three weeks ended October 3, 1998. The weekly average of same store restaurant food sales was $197,672 and $183,711 for the fifty two weeks ended October 2, 1999 and the fifty three weeks ended October 3, 1998 respectively, an increase of 7.6%. Restaurant bar sales represented 13.2% of total sales in the fifty two weeks ended October 2, 1999 as compared to 14.2% in the fifty three weeks ended October 3, 1998. The weekly average of same store restaurant bar sales was $50,245 and $47,293 for the fifty two weeks ended October 2, 1999 and the fifty three weeks ended October 3, 1998 respectively, an increase of 6.2%. Package store sales for the second consecutive year have reversed the decline of prior years with same store weekly sales averaging $133,173 and $121,498 for the fifty two weeks ended October 2, 1999 and the fifty three weeks ended October 3, 1998 respectively, an increase of 9.6%. Franchise revenue increased to $894,000 for the fifty two weeks ended October 2, 1999 as compared to $761,000 for the fifty three weeks ended October 3, 1998. The increase in franchise revenue resulted from higher sales for the franchises, and a joint venture restaurant having been open for all fifty two weeks ending October 2, 1999 whereas it was only open for business in the second quarter of fiscal year 1998. Owner's fee represents fees received pursuant to a Management Agreement from the operation of a club owned by the Company in Atlanta, Georgia. The Management Agreement was amended effective July 1, 1996, whereby the Company also receives ten percent of annual sales exceeding $150,000 per annum as additional owner's fees. Income from this club was $230,000 for the fifty two weeks ended October 2, 1999 as compared to $173,000 for the fifty three weeks ended October 3, 1998. 29 During the second quarter of fiscal year 1998, the Company began operating a restaurant under the "Flanigan's Seafood Bar and Grill" servicemark as general partner and forty two percent owner of a limited partnership established for such purpose. The Company reports income and investment under the equity method of accounting. The Company reported $99,000 in income for the fifty two weeks ended October 2, 1999 as compared to a loss of $66,000 for the fifty three weeks ended October 3, 1998. The loss in fiscal year 1998 was attributed to pre-opening costs and expenditures of certain intangible costs as required by SOP 98-5, "reporting on the costs of start-up activities". During the second quarter of fiscal year 1999, the Company formed a limited partnership to renovate and operate a restaurant under the "Flanigan's Seafood Bar and Grill" servicemark in Kendall, Florida, as general partner and forty percent owner of the same. Due to difficulties in obtaining the required permits to begin construction which were beyond the control of the Company, construction began in the first quarter of fiscal year 2000 and the restaurant is expected to open during the second quarter of fiscal year 2000. The Company recognized a loss of $106,000 for the fifty two weeks ended October 2, 1999. The loss was attributed to pre-opening costs and expenditures of certain intangible costs as required by SOP-98-5, "reporting on the costs of start-up activities". The gross profit margin for restaurant sales were 64.2% and 62.3% for the fiscal years 1999 and 1998 respectively. The gross profit margin for package goods sales were 26.6% and 26.0%, for the fiscal years 1999 and 1998 respectively. Overall gross profits were 50.7% and 50.0% for the fiscal years 1999 and 1998 respectively. Operating Costs and Expenses Operating costs and expenses for the fifty two weeks ended October 2, 1999 were $20,772,000 compared to $20,383,000 for the fifty three weeks ended October 3, 1998. Operating expenses are comprised of the cost of merchandise sold, payroll and related costs, occupancy costs and selling, general and administrative expenses. Payroll and related costs which include workers compensation insurance premiums were $6,135,000 and $5,964,000 for fiscal years 1999 and 1998, respectively. The 2.9% increase is attributed to increases in salaries paid to restaurant and package division employees. 30 Occupancy costs, which include rent, common area maintenance, repairs and taxes were $1,033,000 and $1,047,000 for fiscal years 1999 and 1998 respectively. The 0.1 % decrease was attributable to the closing of a restaurant and the opening of a package store. Selling, general and administrative expenses were $3,410,000 for the fifty two weeks ended October 2, 1999 and $3,163,000 for the fifty three weeks ended October 3, 1998. The net increase of 7.8% in selling, general and administrative expenses is due to a general increase in prices. Other Income and Expenses Other income and expense totaled $232,000 and $37,000 in fiscal years 1999 and 1998 respectively. The decrease of $43,000 in interest expense on long-term debt and damages payable, which were $114,000 and $157,000 for the fifty two weeks ended October 2, 1999 and the fifty three weeks ended October 3, 1998 is attributed to the decrease in long term debt. The decline of $12,000 in interest expense on obligations under capital leases, which was $34,000 and $46,000 for fiscal years 1999 and 1998, respectively, is the result of declining principal balances of the capital leases in general. The Company realized $110,000 of income in the first quarter of fiscal year 1998 from the settlement of litigation. The Company recovered $157,000 from a workman's compensation settlement in the fourth quarter of fiscal year 1999 for a claim in fiscal year 1994 and reduced by $118,000 a workman's compensation reserve from a claim in fiscal year 1993. The category "Other, net" was $325,000 for the fifty two weeks ended October 2, 1999 and $162,000 for the fifty three weeks ended October 3, 1998. Other, net in the consolidated statements of income consists of the following for the fiscal years ended October 2, 1999 and October 3, 1998: Fiscal Years Ended --------------------- 1999 1998 --------- --------- Non-franchise related rental income $ 36,000 $ 45,000 Loss on retirement of fixed assets (66,000) (37,000) Settlement of litigation - 110,000 Insurance recovery & reserve reduction 275,000 - Sale of liquor license 30,000 - Miscellaneous 50,000 44,000 --------- --------- Other Net $ 325,000 $ 162,000 ========= ========= 31 Trends During the next twelve months management expects continued increases in restaurant and package goods sales, both for Company stores and franchised stores. The Company anticipates expenses to increase slightly, therefore increasing overall profits before income taxes. The Company utilized the balance of its net operating loss carryforward during fiscal year 1999. The Company will be fully taxable for fiscal year 2000 which will create a material increase in its Federal and State tax expense. The Company intends to add additional restaurants and package stores as cash becomes available. Other Matters Impact of Inflation The Company does not believe that inflation has had any material effect during the past two years. To the extent allowed by competition, the Company recovers increased costs by increasing prices. Post Retirement Benefits Other Than Pensions The Company currently provides no post retirement benefits to any of its employees, therefore Financial Accounting Standards Board Statement No. 106 has no effect on the Company's financial statements. Subsequent Events During the fourth quarter of fiscal year 1999, the Company entered into a contract for the purchase of a two story office building in Fort Lauderdale, Florida for a purchase price of $850,000, which will be used as the Company's corporate office. The Company also plans to renovate a portion of the ground floor of the office building for use as a package liquor store. The Company closed on the purchase of the office building during the first quarter of fiscal year 2000, paying the entire purchase price in cash. 32 Item 8. Financial Statements and Supplementary Data. Financial statements of the Company at October 2, 1999 and October 3, 1998, which include each of the two years in the period ended October 2, 1999 and the independent certified public accountants' report thereon, are incorporated by reference from the 1999 Annual Report to Shareholders, included herein. Item 9. Change in Certifying Accountant. On February 26, 1999, the Audit Committee recommended and the Board of Directors adopted a resolution authorizing management (i) to dismiss Arthur Andersen, LLP ("AA"), as the Company's independent accountant, effective upon management's notification to AA of such dismissal, and (ii) concurrently with such dismissal, to engage Rachlin, Cohen & Holtz, LLP ("RCH"), as the Company's independent accountant for the fiscal year ended October 2, 1999. On March 4, 1999, the Company notified AA of its dismissal. Also on March 4, 1999, the Company engaged RCH as the Company's independent accountant, effective immediately. During fiscal years 1997 and 1998, and during the subsequent interim period preceding the decision to change independent accountant, neither the Company nor anyone on its behalf consulted RCH regarding either the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company's financial statements, and neither a written report nor oral advice was provided to the Company by RCH with respect to any such consultation. AA audited the Company's annual consolidated financial statements as of and for each of the fiscal years from the date of the Company's initial offering in 1969 through the fiscal year ended October 3, 1998, ("Historical Financial Statements"). AA's auditors' reports for at least the past seven (7) years on these Historical Financial Statements did not contain any adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles. By a current report on Form 8-K, dated March 5, 1999 and filed with the Securities and Exchange Commission on March 12, 1999, in connection with AA's dismissal, the Company reported that during the two (2) most recent fiscal years, and in the subsequent interim period, there had been no disagreements between the Company's management and AA on any matters of accounting principles or practices, Financial Statements, disclosure or auditing scope and procedures which, if not resolved to the satisfaction of AA, would have caused AA to make reference to the matters in an auditor's report. By letter dated March 5, 1999, and filed with the Securities and Exchange Commission, AA indictaed agreement with the statements contained within the form 8-K. 33 PART III Item 10. Directors and Executive Officers of the Registrant. The information set forth under the caption "Election of Directors" in the Company's definitive Proxy Statement for its 2000 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission pursuant to regulation 14A under the Securities and Exchange Act of 1934, as amended (the 2000 Proxy Statement), is incorporated herein by reference. See also "Executive Officers of the Registrant" included in Part I hereof. Item 11. Executive Compensation. The information set forth in the 2000 Proxy Statement under the caption "Executive Compensation" is incorporated by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management. The information set forth under the caption "Security Ownership of Certain Beneficial Owners and Management" in the 2000 Proxy Statement is incorporated by reference. Item 13. Certain Relationships and Related Transactions. The information set forth under the caption "Election of Directors - Certain Relationships and Related Transactions" in the 2000 Proxy Statement is incorporated by reference. PART IV Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K. (a) 1. Financial Statements All the financial statements, financial statement schedule and supplementary data listed in the accompanying Index to Exhibits are filed as part of this Annual Report. 2. Exhibits The exhibits listed on the accompanying Index to Exhibits are filed as part of this Annual Report. (b) Reports on Form 8-K No reports on form 8-K were filed during the fourth quarter of fiscal year 1999 or subsequent to year end. 34 Index to Exhibits Item (14) (a) (2) Description (2) Plan of Reorganization, Amended Disclosure Statement, Amended Plan of Reorganization, Modification of Amended Plan of Reorganization, Second Modification of Amended Plan of Reorganization, Order Confirming Plan of Reorganization, (Item 7 (c) of Quarterly Report on Form 8-K filed May 5, 1987 is incorporated herein by reference). (3) Restated Articles of Incorporation (Part IV, Item 4 (a) (2) of Annual Report on Form 10-K filed on December 29, 1982 is incorporated herein by reference). (10)(a)(1) Employment Agreement with Joseph G. Flanigan (Exhibit A of the Proxy Statement dated January 27, 1988 is incorporated herein by reference). (10)(a)(2) Form of Employment Agreement between Joseph G. Flanigan and the Company (as ratified and amended by the stockholders at the 1988 annual meeting is incorporated herein by reference). (10)(c) Consent Agreement regarding the Company's Trademark Litigation (Part 7(c)(19) of the Form 8-K dated April 10, 1985 is incorporated herein by reference). (10)(d) King of Prussia (#850) Partnership Agreement (Part 7 (c) (19) of the Form 8-K dated April 10, 1985 is incorporated herein by reference). (10)(o) Management Agreement for Atlanta, Georgia, (#600) (Item 14(a)(10)(o) of the Form 10-K dated October 3, 1992 is incorporated herein by reference). (10)(p) Settlement Agreement with Former Vice Chairman of the Board of Directors (re #5) (Item 14 (a)(10)(p) of the Form 10-K dated October 3, 1992 is incorporated herein by reference). (10)(q) Hardware Purchase Agreement and Software License Agreement for restaurant point of sale system. (Item 14(a)(10)(g) of Form 10-KSB dated October 2, 1993 is incorporated herein by reference). (10)(a)(3) Key Employee Incentive Stock Option Plan (Exhibit A of the Proxy Statement dated January 26, 1994 is incorporated herein by reference). 35 (10)(r) Limited Partnership Agreement of CIC Investors #13, Ltd,. between Flanigan's Enterprises, Inc., as General Partner and fifty percent owner of the limited partnership, and Hotel Properties, LTD. (Item 14 (a)(10)(r) of the Form 10-KSB dated September 30, 1995 is incorporated herein by reference). (10)(s) Form of Franchise Agreement between Flanigan's Enterprises, Inc. and Franchisees. (Item 14 (a)(10)(s) of the Form 10-KSB dated September 30, 1995 is incorporated herein by reference). (10)(t) Licensing Agreement between Flanigan's Enterprises, Inc. and James B. Flanigan, dated November 4, 1996, for non-exclusive use of the servicemark "Flanigan's" in the Commonwealth of Pennsylvania. (Item 14 (a)(10)(t) of the Form 10-KSB dated September 28, 1996 is incorporated herein by reference). (10)(u) Limited Partnership Agreement of CIC Investors #15 Ltd., dated March 28, 1997, between B.D. 15 Corp. as General Partner and numerous limited partners, including Flanigan's Enterprises, Inc. as a limited partner owning twenty five percent of the limited partnership (Item 14 (a)(10)(u) of the Form 10-KSB dated September 27, 1997 is incorporated herein by reference). (10)(v) Limited Partnership Agreement of CIC Investors #60 Ltd., dated July 8, 1997, between Flanigan's Enterprises, Inc., as General Partner and numerous limited partners, including Flanigan's Enterprises, Inc. as limited partner owning forty percent of the limited partnership (Item 14 (a)(10)(v) of Form 10-KSB dated September 27, 1997 is incorporated herein by reference). (10)(w) Stipulated Agreed Order of Dismissal upon Mediation with former franchisee (Item 14 (a)(10)(w) of Form 10-KSB dated September 27, 1997 is incorporated herein by reference). (10)(x) Limited Partnership Agreement of CIC Investors #70, Ltd. dated February 1999 between Flanigan's Enterprises, Inc. as General Partner and numerous limited partners, including Flanigan's Enterprises, Inc. as limited partner owning forty percent of the limited partnership. (11) Statement regarding computation of per share earnings is set forth in this Annual Report on Form 10-KSB. (13) Registrant's Form 10-KSB constitutes the Annual Report to Shareholders for the fiscal year ended October 2, 1999. (22)(a) Company's subsidiaries are set forth in this Annual Report on Form 10-KSB. 36 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 the registrant had duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Flanigan's Enterprises, Inc. Registrant By: JOSEPH G. FLANIGAN Date: 1/3/00 ------------------ ------ Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in their capacities and on the dates indicated. JOSEPH G. FLANIGAN Chairman of the Board, Date: 1/3/00 - ------------------ Chief Executor Officer, ------ Joseph G. Flanigan and President EDWARD A. DOXEY Chief Financial Officer Date: 1/3/00 - --------------- Secretary and Director ------ Edward A. Doxey CHARLES KUHN Director Date: 1/3/00 - ------------ ------ Charles Kuhn GERMAINE M. BELL Director Date: 1/3/00 - ---------------- ------ Germaine M. Bell CHARLES E. MCMANUS Director Date: 1/3/00 - ------------------ ------ Charles E. McManus JEFFREY D. KASTNER Assistant Secretary Date: 1/3/00 - ------------------- and Director ------ Jeffrey D. Kastner WILLIAM PATTON Vice President, Public Date: 1/3/00 - -------------- Relations and Director ------ William Patton JAMES G. FLANIGAN Director Date: 1/3/00 - ----------------- ------ James G. Flanigan PATRICK J. FLANIGAN Director Date: 1/3/00 - ------------------- ------ Patrick J. Flanigan 38 FLANIGAN'S ENTERPRISES, INC. and SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS AND SCHEDULES PAGE ---- REPORTS OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-1-F-2 CONSOLIDATED FINANCIAL STATEMENTS Balance Sheet F-3 Statements of Income F-4 Statements of Stockholder's Equity F-5 Statements of Cash Flows F-6-F-7 Notes to Financial Statements F-8-F-24 39 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors and Stockholders Flanigan's Enterprises, Inc. Fort Lauderdale, Florida We have audited the accompanying consolidated balance sheet of Flanigan's Enterprises, Inc. and Subsidiaries as of October 2, 1999, and the related consolidated statements of income, stockholders' equity and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Flanigan's Enterprises, Inc. and Subsidiaries as of October 2, 1999, and the consolidated results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. RACHLIN COHEN & HOLTZ LLP Fort Lauderdale, Florida November 24, 1999 except for last paragraph of Note 15, as to which the date is December 14, 1999 F-1 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of Flanigan's Enterprises, Inc.: We have audited the accompanying consolidated statements of income, stockholders' equity and cash flows of Flanigan's Enterprises, Inc. (a Florida corporation) and subsidiaries for the year ended October 3, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Flanigan's Enterprises, Inc. and subsidiaries for the year ended October 3, 1998 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Fort Lauderdale, Florida, December 10, 1998. F-2 FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET OCTOBER 2, 1999 ASSETS Current Assets: Cash and cash equivalents $ 1,752,000 Notes and mortgages receivable, current maturities, net 212,000 Inventories 1,428,000 Prepaid expenses 402,000 Deferred tax asset 281,000 ------------ Total current assets 4,075,000 Property and Equipment 4,004,000 Leased Property Under Capital Leases, Net 93,000 ------------ Other Assets: Liquor licenses, net 303,000 Notes and mortgages receivable, net 171,000 Investments in joint ventures 1,471,000 Deferred tax asset 349,000 Other 306,000 ------------ Total other assets 2,600,000 ------------ Total assets $ 10,772,000 ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable and accrued expenses $ 1,594,000 Due to franchisees 699,000 Current portion of long-term debt 84,000 Current obligations under capital leases 38,000 Current portion of damages payable on terminated or rejected leases 278,000 ------------ Total current liabilities 2,693,000 Long-Term Debt, Net of Current Maturities 500,000 ------------ Obligations Under Capital Leases, Net of Current Portion 205,000 ------------ Damages Payable on Terminated or Rejected Leases, Net of Current Portion 394,000 ------------ Commitments, Contingencies, Other Matters and Subsequent Event Stockholders' Equity: Common stock, $.10 par value; 5,000,000 shares authorized; 4,197,642 shares issued 420,000 Capital in excess of par value 6,058,000 Retained earnings 5,416,000 Notes receivable on sale of common stock (192,000) Less - treasury stock, at cost, 2,247,193 shares (4,722,000) ------------ Total stockholders' equity 6,980,000 ------------ Total liabilities and stockholders' equity $ 10,772,000 ============ See notes to consolidated financial statements. F-3 FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME OCTOBER 2, 1999 AND OCTOBER 3, 1998 1999 1998 ------------ ------------ Revenues: Restaurant food sales $ 10,708,000 $ 10,628,000 Restaurant bar sales 2,722,000 2,891,000 Package goods sales 7,255,000 6,901,000 Franchise-related revenues 894,000 761,000 Owner's fee 230,000 173,000 Joint venture income 341,000 207,000 Other operating income 165,000 206,000 ------------ ------------ 22,315,000 21,767,000 Costs and Expenses: Cost of merchandise sold: Restaurants and lounges 4,871,000 5,102,000 Package goods 5,323,000 5,107,000 Payroll and related costs 6,135,000 5,964,000 Occupancy costs 1,033,000 1,047,000 Selling, general and administrative expenses 3,410,000 3,163,000 ------------ ------------ 20,772,000 20,383,000 Income from Operations 1,543,000 1,384,000 ------------ ------------ Other Income (Expense): Interest expense on obligations under capital leases (34,000) (46,000) Interest expense on long-term debt and damages payable (114,000) (157,000) Interest income 52,000 72,000 Recognition of deferred gains 3,000 6,000 Other 325,000 162,000 ------------ ------------ 232,000 37,000 ------------ ------------ Income Before Provision for Income Taxes 1,775,000 1,421,000 ------------ ------------ Provision (Benefit) for Income Taxes: Current 37,000 33,000 Deferred (630,000) -- ------------ ------------ (593,000) 33,000 Net Income $ 2,368,000 $ 1,388,000 ============ ============ Net Income Per Common Share: Basic $ 1.21 $ 0.76 ============ ============ Diluted $ 1.15 $ 0.69 ============ ============ Weighted Average Shares and Equivalent Shares Outstanding: Basic 1,957,000 1,830,000 ============ ============ Diluted 2,062,000 2,020,000 ============ ============ See notes to consolidated financial statements. F-4 FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY OCTOBER 2, 1999 AND OCTOBER 3, 1998 Notes Common Stock Capital in Receivable -------------------- Excess of Retained on Sale of Shares Amount Par Value Earnings Common Stock ------ ------ --------- -------- ------------ Balance, September 27, 1997 4,197,642 $420,000 $ 6,185,000 $ 1,846,000 $ - Year Ended October 3, 1998: Net income - - - 1,388,000 - Stock options exercised - - - - - --------- -------- ----------- ----------- ---------- Balance, October 3, 1998 4,197,642 420,000 6,185,000 3,234,000 - Year Ended October 2, 1999: Dividends paid ($0.10 per share) - - - (186,000) - Net income - - - 2,368,000 - Purchase of treasury stock - - - - - Common stock issued in exchange for notes receivable - - 61,000 - (198,000) Exchange of shares - exercise of stock options - - (188,000) - - Payments received on notes receivable - - - - 6,000 --------- -------- ----------- ----------- ---------- Balance, October 2, 1999 4,197,642 $420,000 $ 6,058,000 $ 5,416,000 $ (192,000) ========= ======== =========== =========== ========== Treasury Stock --------------------- Shares Amount Total ------ ------ ----- Balance, September 27, 1997 2,383,442 $(4,812,000) $ 3,639,000 Year Ended October 3, 1998: Net income - - 1,388,000 Stock options exercised (44,000) 78,000 78,000 --------- ----------- ----------- Balance, October 3, 1998 2,339,442 (4,734,000) 5,105,000 Year Ended October 2, 1999: Dividends paid ($0.10 per share) - - (186,000) Net income - - 2,368,000 Purchase of treasury stock 68,700 (313,000) (313,000) Common stock issued in exchange for notes receivable (68,000) 137,000 - Exchange of shares - exercise of stock options (92,949) 188,000 - Payments received on notes receivable - - 6,000 --------- ----------- ----------- Balance, October 2, 1999 2,247,193 $(4,722,000) $ 6,980,000 ========= =========== =========== See notes to consolidated financial statements. F-5 FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED OCTOBER 2, 1999 AND OCTOBER 3, 1998 1999 1998 ----------- ----------- Cash Flows from Operating Activities: Net income $ 2,368,000 $ 1,388,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 637,000 655,000 Deferred income taxes benefit (630,000) -- Reduction of uncollectible notes and mortgages receivable -- (124,000) Recognition of deferred gains and other deferred income (3,000) (6,000) Loss on disposal of property, equipment and liquor licenses 36,000 37,000 Joint venture income (341,000) -- Changes in operating assets and liabilities: (Increase) decrease in: Receivables 208,000 (151,000) Inventories (191,000) 16,000 Prepaid expenses 29,000 (98,000) Other assets (152,000) (96,000) Increase (decrease) in: Accounts payable and accrued expenses (8,000) (561,000) Due to franchisees 699,000 -- ----------- ----------- Net cash provided by operating activities 2,652,000 1,060,000 ----------- ----------- Cash Flows from Investing Activities: Collections on notes and mortgages receivable 95,000 48,000 Purchase of property and equipment (934,000) (808,000) Investment in joint venture (606,000) -- Distributions from joint ventures 413,000 -- ----------- ----------- Net cash used in investing activities (1,032,000) (760,000) ----------- ----------- Cash Flows from Financing Activities: Borrowings of long-term debt -- 500,000 Payments of long-term debt (450,000) (362,000) Payments of obligations under capital leases (76,000) (70,000) Payments of damages payable on terminated or rejected leases (281,000) (260,000) Due to Pennsylvania limited partnership (30,000) (52,000) Purchase of treasury stock (313,000) -- Dividends paid (186,000) -- Proceeds from exercise of options -- 78,000 ----------- ----------- Net cash used in financing activities (1,336,000) (166,000) ----------- ----------- Net Increase in Cash and Cash Equivalents 284,000 134,000 Cash and Cash Equivalents, Beginning 1,468,000 1,334,000 ----------- ----------- Cash and Cash Equivalents, Ending $ 1,752,000 $ 1,468,000 =========== =========== (Continued) See notes to consolidated financial statements. F-6 FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED OCTOBER 2, 1999 AND OCTOBER 3, 1998 (Continued) (Continued) 1999 1998 ----------- --------- Supplemental Disclosure of Cash Flow Information: Cash paid during the year for: Interest $ 168,000 $ 199,000 =========== ========= Income taxes $ 52,000 $ 33,000 =========== ========= Non-Cash Financing and Investing Activities: Retirement of unrealizable general ledger system, at net book value $ -- $ 37,000 =========== ========= Investment in joint venture $ -- $ (50,000) =========== ========= Receipt of liquor license in connection with litigation settlement $ -- $ 35,000 =========== ========= Common stock issued for notes receivable $ 198,000 $ -- =========== ========= Notes receivable for sales of property, equipment and intangible assets $ 196,000 $ -- =========== ========= See notes to consolidated financial statements. F-7 FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 2, 1999 AND 1998 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Capitalization Incorporated in 1959, Flanigan's Enterprises, Inc. ("Flanigan's" or the "Company") operates in South Florida as a chain of full-service restaurants and package liquor stores. At October 2, 1999, the Company owned and/or operated five full-service restaurants, three package liquor stores and four combination full-service restaurants and package liquor stores in Florida. In addition, Flanigan's owns one club in Georgia which is operated pursuant to a management agreement with an unrelated third party. The Company holds interests in four of the eleven franchised units through joint venture investments. The Company's restaurants are operated under the "Flanigan's Seafood Bar and Grill" servicemark while the Company's package stores are operated under the "Big Daddy's Liquors" servicemark. The Company's Articles of Incorporation, as amended, authorize the Company to issue and have outstanding at any one time 5,000,000 shares of common stock at a par value of $.10. The Company authorized and effected a 2-for-1 stock split for stockholders of record on March 17, 1999. This stock split has been given retroactive effect in these consolidated financial statements. The Company operates under a 52-53 week year ending the Saturday closest to September 30. Principles of Consolidation The consolidated financial statements include the accounts of Flanigan's Enterprises, Inc. and its subsidiaries, all of which are wholly owned. All significant intercompany transactions and balances have been eliminated in consolidation. The entities included in these consolidated financial statements are as follows: Flanigan's Enterprises, Inc. Flanigan's Management Services, Inc. Flanigan's Enterprises, Inc. of Georgia Flanigan's Enterprises, Inc. of Pa. Seventh Street Corp. Big Daddy's #48, Inc. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Although these estimates are based on management's knowledge of current events and actions it may undertake in the future, they may ultimately differ from actual results. F-8 FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Cash and Cash Equivalents The Company considers all highly liquid debt instruments with a maturity of three months or less at the date of purchase to be cash equivalents. Inventories Inventories, which consist primarily of packaged liquor products, are stated at the lower of cost (first in, first out) or market. Liquor Licenses The cost of liquor licenses purchased prior to October 21, 1970 (the date Accounting Principles Board ("APB") Opinion No. 17 became effective), amounted to approximately $130,000 at October 2, 1999. These licenses are not amortized unless an impairment in value is indicated. The costs of all liquor licenses acquired subsequent to October 21, 1970 are amortized over a period of 40 years. Property and Equipment For financial reporting, the Company uses the straight-line method for providing depreciation and amortization on property and equipment. The estimated useful lives range from three to five years for vehicles, and three to seven years for furniture and equipment. Leasehold interests are amortized over the minimum term of the lease. Leasehold improvements are amortized over the life of the lease up to a maximum of 10 years. If the locations are sold or abandoned before the end of the amortization period, the unamortized costs are expensed. Investment in Joint Ventures The Company uses the equity method of accounting when the Company has a twenty percent to fifty percent interest in other companies, joint ventures, and partnerships, and can exercise significant influence. Under the equity method, original investments are recorded at cost and are adjusted for distributions received and the Company's share of undistributed earnings or losses. All significant intercompany profits are eliminated. Concentrations of Credit Risk Financial instruments that potentially subject the Company to concentrations of credit risk are cash and cash equivalents and notes and mortgages receivable. F-9 FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Concentrations of Credit Risk (Continued) From time to time during the year, the Company had deposits in financial institutions in excess of the federally insured limits. At October 2, 1999, the Company had deposits in excess of federally insured limits of approximately $1,639,000. The Company maintains its cash with high quality financial institutions which the Company believes limits these risks. Notes and mortgages receivable arise primarily from the sale of operating assets, including liquor licenses. Generally, those assets serve as collateral for the receivable. Management believes that the collateral, coupled with the quality of the purchasers, limits the risk. Advertising Costs Advertising costs are expensed as incurred. Advertising costs incurred for the years ended October 2, 1999 and October 3, 1998 were $160,000 and $226,000, respectively. Fair Value of Financial Instruments The respective carrying value and cash equivalents of certain on-balance-sheet financial instruments approximated their fair value. These instruments include cash and cash equivalents, notes and mortgages receivable, damages payable on terminated or rejected leases, debt and capital leases, and accounts payable. Fair values were assumed to approximate carrying values for those financial instruments which are short-term in nature or are receivable or payable on demand. Newly Issued Accounting Pronouncements In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income" and No. 131, "Disclosures About Segments of an Enterprise and Related Information". SFAS No. 130 establishes standards for reporting and displaying comprehensive income, its components and accumulated balances. SFAS No. 131 establishes standards for the way that public companies report information about operating segments in annual financial statements and requires reporting of selected information about operating segments in interim financial statements issued to the public. Both SFAS No. 130 and SFAS No. 131 are effective for periods beginning after December 15, 1997. The Company adopted these new accounting standards in fiscal year 1999. F-10 FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Newly Issued Accounting Pronouncements (Continued) In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133 requires companies to recognize all derivatives contracts as either assets or liabilities in the balance sheet and to measure them at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge, the objective of which is to match the timing of the gain or loss recognition on the hedging derivative with the recognition of (i) the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk or (ii) the earnings effect of the hedged forecasted transaction. For a derivative not designated as a hedging instrument, the gain or loss is recognized in income in the period of change. On June 30, 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133." SFAS No. 133 as amended by SFAS No. 137 is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. Historically, the Company has not entered into derivatives contracts to hedge existing risks or for speculative purposes. Accordingly, the Company does not expect adoption of the new standard on October 1, 2000 to affect its financial statements. In March 1998, the Accounting Standards Executive Committee issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 requires all costs related to the development of internal use software other than those incurred during the application development stage to be expensed as incurred. Costs incurred during the application development stage are required to be capitalized and amortized over the estimated useful life of the software. SOP 98-1 was adopted by the Company in fiscal 1999 and did not have a material effect on the Company's financial position or results of operations. Income Taxes The Company accounts for its income taxes using SFAS No. 109, Accounting for Income Taxes, which requires the recognition of deferred tax liabilities and assets for expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. F-11 FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Stock-Based Compensation Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), encourages, but does not require companies to record stock-based compensation plans using a fair value based method. The Company has chosen to continue to account for stock-based compensation using the intrinsic value based method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's common stock at the date of the grant over the amount an employee must pay to acquire the stock. Long-Lived Assets The Company continually evaluates whether events and circumstances have occurred that may warrant revision of the estimated life of its intangible and other long-lived assets or whether the remaining balance of its intangible and other long-lived assets should be evaluated for possible impairment. If and when such factors, events or circumstances indicate that intangible or other long-lived assets should be evaluated for possible impairment, the Company will make an estimate of undiscounted cash flow over the remaining lives of the respective assets in measuring their recoverability. NOTE 2. NOTES AND MORTGAGES RECEIVABLES Receivables, net of allowances for uncollectible amounts and deferred gains, consist of the following at October 2, 1999: Notes and mortgages receivable from unrelated parties, bearing interest at rates ranging from 9% to 15% and due in varying installments through 2002 $225,000 Notes and mortgages receivable from related parties, bearing interest at rates ranging from 10% to 14% and due in varying installments through 2007 125,000 Various noninterest-bearing receivables currently due 127,000 -------- 477,000 Less deferred gains 94,000 -------- 383,000 Amount representing current portion 212,000 -------- $171,000 ======== F-12 FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 2. NOTES AND MORTGAGES RECEIVABLES (Continued) The majority of the notes and mortgages receivable represent amounts owed to the Company for store operations which were sold. Unless a significant amount of cash is received on the sale, a pro rata portion of the gain is deferred and recognized only as payments on the notes and mortgages are received by the Company. Any losses on sales of stores are recognized currently. During fiscal 1999 and 1998, $3,000 and $6,000 of deferred gains were recognized on collections of such notes receivable. Future scheduled payments on the receivables at October 2, 1999 consist of the following: 2000 $212,000 2001 35,000 2002 55,000 2003 21,000 2004 18,000 Thereafter 136,000 -------- $477,000 ======== NOTE 3. PROPERTY AND EQUIPMENT Property and equipment at October 2, 1999 consisted of the following: Land and land improvements $ 836,000 Vehicles 122,000 Furniture and equipment 5,412,000 Leasehold interests and improvements 5,154,000 ----------- 11,524,000 Less accumulated depreciation and amortization 7,520,000 ----------- $ 4,004,000 =========== NOTE 4. INVESTMENTS IN JOINT VENTURES Miami, Florida The Company operates a restaurant in Miami, Florida under the "Flanigan's Seafood Bar and Grill" servicemark pursuant to a joint venture agreement. The Company is the general partner and has a fifty percent limited partnership interest. Fort Lauderdale, Florida The Company has entered into a franchise agreement with a unit in Fort Lauderdale. The Company is a twenty-five percent limited partner in the franchise. Other related parties, including, but not limited to, officers and directors of the Company and their families are also investors. F-13 FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 4. INVESTMENTS IN JOINT VENTURES (Continued) Surfside, Florida The Company has an investment in a limited partnership which purchased the assets of a restaurant in Surfside, Florida and renovated it for operation under the "Flanigan's Seafood Bar and Grill" servicemark. The Company acts as general partner of the limited partnership and is also a forty percent limited partner. Other related parties, including, but not limited to, officers and directors of the Company and their families are also investors. Kendall, Florida During 1999, the Company made an investment in a limited partnership which will construct and operate a restaurant under the "Flanigan's Seafood Bar and Grill" servicemark in Kendall, Florida. Construction was begun in late 1999 and the restaurant is expected to open in early 2000. The Company acts as the general partner and has a forty percent limited partnership interest. The Company recognized a loss on the equity method relating to this partnership of $106,000 due primarily to the expensing of start-up costs as required by SOP 98-5, "Reporting on the Costs of Start-up Activities." The following is a summary of condensed unaudited financial information pertaining to the Company's joint venture investments: 1999 1998 ---- ---- Financial Position: Current assets $ 564,000 $ 205,000 Non-current assets 3,038,000 2,960,000 Current liabilities 437,000 324,000 Non-current liabilities 548,000 589,000 Operating Results: Revenues $5,609,000 $6,083,000 Gross profit 3,600,000 3,345,000 Net income 424,000 854,000 NOTE 5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses consist of the following at October 2, 1999: Accounts payable $ 902,000 Salaries and wages 319,000 Property taxes 115,000 Potential uninsured claims 101,000 Franchisee advance funds 40,000 Other 117,000 ---------- $1,594,000 ========== F-14 FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES (Continued) Franchisee advance funds represent cash advances by the franchisees for inventory purchases to be made as part of the Company-sponsored cooperative buying program. NOTE 6. DAMAGES PAYABLE ON TERMINATED OR REJECTED LEASES On November 4, 1985, Flanigan's Enterprises, Inc., not including any of its subsidiaries, filed a voluntary petition in the United States Bankruptcy Court for the Southern District of Florida seeking to reorganize under Chapter 11 of the Federal Bankruptcy Code. Flanigan's was authorized to continue the management and control of its business and property as debtor-in-possession under the Bankruptcy Code. On May 5, 1987, Flanigan's Plan of Reorganization, as amended and modified, was confirmed by the Bankruptcy Court. On December 28, 1987, Flanigan's was officially discharged from bankruptcy. In fiscal 1986 in connection with the bankruptcy petition, Flanigan's recorded estimated damages of $4,278,000 for claims for losses as a result of rejected leases. Because the damage payments were to be made over nine years, the total amount due was discounted at a rate of 9.25%, Flanigan's then effective borrowing rate. Remaining liabilities for damage payments are included as "Damages Payable on Terminated or Rejected Leases" in the accompanying consolidated balance sheet. Based on the borrowing rate currently available to the Company for bank loans with similar terms and average maturities, the fair value of damages payable on terminated and rejected leases is approximately $672,000. As of October 2, 1999, damages payable on terminated or rejected leases, including imputed interest, mature as follows: 2000 $300,000 2001 300,000 2002 119,000 -------- Total 719,000 Less amount representing interest 47,000 -------- 672,000 Less current maturities 278,000 -------- Long-term maturities $394,000 ======== F-15 FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 7. INCOME TAXES The components of the Company's provision (benefit) for income taxes, for the fiscal years ended 1999 and 1998 are as follows: 1999 1998 ---- ---- Current: Federal $ 24,000 $29,000 State 13,000 4,000 --------- ------- 37,000 33,000 Deferred: Federal (610,000) - State (20,000) - --------- ------- (630,000) - --------- ------- $(593,000) $33,000 ========= ======= A reconciliation of income tax computed at the statutory federal rate to income tax expense (benefit) is as follows: 1999 1998 ---- ---- Tax provision at the statutory rate of 34% $582,000 $ 483,000 State income taxes, net of federal income tax 10,000 3,000 Change in valuation allowance (983,000) (489,000) Tip and alternative minimum tax credit carryforwards 250,000 - Other 48,000 36,000 --------- ---------- $(593,000) $ 33,000 ========= ========== At October 2, 1999, the Company has available tax net operating loss carryforwards of approximately $100,000 which expire through 2006, tip credit carryforwards of approximately $200,000 which expire through 2015, and alternative minimum tax credit carryforwards of approximately $50,000 which do not expire. In addition to net operating loss and tax credit carryforwards, the Company had deferred tax assets which arise primarily due to depreciation recorded at different rates for tax and book purposes, capital leases reported as operating leases for tax purposes, and accruals for potential uninsured claims recorded for financial reporting purposes but not recognized for tax purposes. The components of the deferred tax assets were as follows at October 2, 1999: Current: Accruals for potential uninsured claims $ 34,000 Discount on damages payable (11,000) Joint venture investments (26,000) Net operating loss carryforward 34,000 Tip credit carryforward 200,000 Alternative minimum tax credit 50,000 -------- $281,000 ======== F-16 FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 7. INCOME TAXES (Continued) Long Term: Book/tax differences in property and equipment $299,000 Leases, capitalized for books only 50,000 -------- $349,000 ======== NOTE 8. LONG-TERM DEBT Long-term debt consists of the following at October 2, 1999: Mortgage payable, secured by land, bearing interest at 8%; payable in monthly installments of principal and interest, maturing in April 2007 $344,000 Notes payable to various employees, related and unrelated parties, secured by various company assets, bearing interest at 12%, payable in monthly installments of principal and interest, maturing in July 2002 240,000 584,000 Less current portion 84,000 -------- $500,000 ======== Long-term debt at October 2, 1999 matures as follows: Amount -------- 2000 $ 84,000 2001 95,000 2002 90,000 2003 12,000 2004 12,000 Thereafter 291,000 -------- $584,000 ======== NOTE 9. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS Leases The Company leases a substantial portion of the land and building used in its operations under leases with initial terms expiring between 1999 and 2049. Renewal options are available on many of the leases. In certain instances, lease rentals are subject to cost-of-living increases or fair market rental appraisals and/or sales overrides. Certain properties are subleased through various expiration dates. F-17 FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 9. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (Continued) Leases (Continued) Leased property under capital leases is amortized on a straight-line basis over the lease term, and interest expense (which is based on the Company's incremental borrowing rate at the inception of the lease) is accrued on the basis of the outstanding capital lease obligation. Rentals relating to operating leases are expensed currently. Future minimum lease payments under capital leases and non-cancelable operating leases are as follows: Capital Operating Leases Leases ------ ------ 2000 $ 77,000 $ 858,000 2001 55,000 581,000 2002 32,000 403,000 2003 32,000 371,000 2004 32,000 358,000 Thereafter 171,000 1,020,000 --------- ---------- Total 399,000 $3,591,000 ========== Less amount representing interest 156,000 --------- Present value of minimum lease payments 243,000 Less current obligations under capital leases 38,000 --------- $ 205,000 ========= Total rent expense for all operating leases (including those with an initial term of less than one year and net of subleases) was $695,000 and $672,000 in 1999 and 1998, respectively, and is included in "Occupancy costs" in the accompanying consolidated statements of income. The Company guarantees various leases for franchisees. Remaining rental commitments required under these leases are approximately $1,712,000. Franchise Programs At October 2, 1999, the Company operated seven units under franchise agreements and three units under joint venture agreements. Additionally, the Company has one other unit under construction under a joint venture agreement (see Note 4). Under the franchise agreements, the Company agrees to provide guidance, advice and management assistance to the franchisees. The Company also agrees to sponsor and manage cooperative buying groups on behalf of the franchisees for the purchase of inventory. The franchise agreements provide for fees to the Company of approximately 3% of gross sales. Of the seven franchised stores, five are owned or operated by related parties. When received, initial franchise fees are deferred and recognized ratably as payments are received on the related notes. The Company is not currently offering or accepting new franchises. F-18 FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 9. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (Continued) Employment Agreements Chief Executive Officer The Company has entered into an employment agreement with the Chief Executive Officer which is renewable annually on December 31. The agreement provides, among other things, for a base annual salary not to exceed $150,000, a performance bonus equal to fifteen percent of pre-tax net income in excess of $650,000 and an option to purchase 4.99% of the outstanding common stock of the Company (but not less than 45,350 shares) at $2.48 per share (post-stock split). This option expires December 31, 2001. During 1999, the employee exercised options to purchase 50,000 shares of common stock. Store Managers In the ordinary course of business, the Company enters into employment agreements with store managers, which provide for, among other things, base annual salary, performance bonuses, and various employee benefits. In principle, these agreements may be terminated by the Company for cause and by the manager with notice. NOTE 10. COMMON STOCK Treasury Stock Exchange of Common Shares During fiscal 1999, the Company accepted shares of Company common stock owned by certain employee/officers of the Company as full payment of financial obligations that arose as the result of exercising options. The employee/officers surrendered 46,636 shares of common stock, receiving credit for the then market value of this stock, as satisfaction in full for payments owing pursuant to exercising certain options to acquire 139,585 shares of common stock. Purchase of Common Shares During 1999, the Company purchased a total of 68,700 shares of common stock at a total cost of approximately $313,000 under a repurchase program authorized by the Board of Directors. F-19 FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 10. COMMON STOCK (Continued) Sale of Common Shares The Company sold an aggregate of 68,000 Company common shares to certain employee/officers (38,000 of which were pursuant to the exercise of options) for a total of approximately $198,000. These employee/officers purchased their shares by means of notes which bear interest at 7%. The notes are non-recourse, and are secured by the shares owned by the employee/officers. The majority of the notes provide for payment of interest only until maturity, June 2004. Key Employee Incentive Stock Option Plan In December 1993, the Board of Directors approved a Key Employee Incentive Stock Option Plan, which reserved and authorized the issuance of 100,000 shares of the Company's common stock to eligible employees. At the Company's 1994 annual meeting, the stockholders approved this plan. The stock options vest over a period of one year. At October 2, 1999, options for all of the shares of common stock that were reserved for issuance to the Key Employee Incentive Stock Option Plan had been issued. Common Stock Options In July 1999, the Company granted options to purchase 115,900 shares of Company common stock to certain employees. The options vest one year from the grant date, have a ten-year life, and an exercise price of $4.50 per share. The Company applies APB No. 25 and related interpretations in accounting for its stock-based compensation plans. Accordingly, no compensation cost has been recognized for its stock options plans. Had compensation for the Company's stock-based compensation plans been determined pursuant to SFAS No. 123, the Company's net income and earnings per share would have decreased accordingly. Had compensation cost for the options been determined based on the fair value at the grant date consistent with SFAS 123, the Company's net income would have been as follows: 1999 1998 ---- ---- Net income: As Reported $2,368,000 $1,388,000 Pro Forma 2,260,000 1,388,000 Earnings Per Share: Basic: As Reported 1.21 0.76 Pro Forma 1.15 0.76 Diluted: As Reported 1.15 0.69 Pro Forma 1.10 0.69 F-20 FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 10. COMMON STOCK (Continued) Common Stock Options (Continued) The Company used the Black-Scholes option pricing model to determine the fair value of grants made in 1999. No grants were made in 1998. The following assumptions were applied in determining the pro forma compensation cost: Risk Free Interest Rate 6% Expected Dividend Yield -0- Expected Option Life 5 Years Expected Stock Price Volatility 75% Changes in outstanding incentive stock options for common stock are as follows: 1999 1998 ---- ---- Outstanding at beginning of year 337,980 382,780 Options granted 115,900 - Options exercised (177,585) (45,800) ------- ------- Outstanding at end of year 276,295 337,980 ======= ======= Exercisable at end of year 160,395 337,980 ======= ======= Weighted average option exercise price information for fiscal years 1999 and 1998 is as follows: 1999 1998 ---- ---- Outstanding at beginning of year $2.39 $2.31 Granted during the year 4.50 - Exercised during the year 2.25 1.73 Outstanding at end of year 3.34 2.39 ===== ===== Exercisable at end of year $2.50 $2.39 ===== ===== Significant options groups outstanding at October 2, 1999 and related weighted average price and life information are as follows: Grant Options Options Exercise Remaining Date Outstanding Exercisable Price Life (Years) ---- ----------- ----------- ----- ------------ 12/21/95 52,000 52,000 1.63 1 3/14/96 36,000 36,000 2.25 1.5 1/08/97 72,395 72,395 3.25 2.5 7/3/99 115,900 - 4.50 9.5 F-21 FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 11. NET INCOME PER COMMON SHARE In 1998, the Company adopted SFAS No. 128, "Earnings Per Share." SFAS 128 provides for the calculation of basic and diluted earnings per share. Basic earnings per share includes no dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share assume exercising warrants and options granted and convertible preferred stock and debt. Earnings per share are computed by dividing income available to common stockholders by the basic and diluted weighted average number of common shares. 1999 1998 --------------------- --------------------- Basic Diluted Basic Diluted --------- --------- --------- --------- Weighted average shares outstanding 1,957,000 1,957,000 1,830,000 1,830,000 Incremental shares - application Treasury stock method - Outstanding stock options -- 105,000 -- 190,000 --------- --------- --------- --------- Shares used in calculation of Net Income per Common Share 1,957,000 2,062,000 1,830,000 2,020,000 ========= ========= ========= ========= NOTE 12. RELATED PARTY TRANSACTIONS The Company's Chairman and a relative formed a corporation to manage one of the Company's franchised stores. During fiscal 1999 and 1998, respectively, the Company incurred legal fees in the form of salary of approximately $129,000 and $105,000 for services provided by a member of the Board of Directors. Also see Notes 2, 4, 5, 8, 9, and 10 for additional related party transactions. NOTE 13. BUSINESS SEGMENTS The Company operates principally in two segments - retail package stores and restaurants. The operation of package stores consists of retail liquor sales. Information concerning the revenues and operating income for the years ended October 2, 1999 and October 3, 1998, and identifiable assets for the two segments in which the Company operates, are shown in the following table. Operating income is total revenue less cost of merchandise sold and operating expenses relative to each segment. In computing operating income, none of the following items have been included: interest expense, other non-operating income and expense and income taxes. Identifiable assets by segment are those assets that are used in the Company's operations in each segment. Corporate assets are principally cash and notes and mortgages receivable. The Company does not have any operations outside of the United States and intersegment transactions are not material. 1999 1998 ---- ---- Operating Revenues: Retail package stores $ 7,255,000 $ 6,901,000 Restaurants 13,430,000 13,519,000 Other revenues 1,630,000 1,347,000 ----------- ----------- Total operating revenues $22,315,000 $21,767,000 =========== =========== F-22 FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 13. BUSINESS SEGMENTS (Continued) 1999 1998 ------------ ------------ Income From Operations Reconciled to Income Before Income Taxes: Retail package stores $ 256,000 $ 173,000 Restaurants 1,607,000 1,378,000 ------------ ------------ 1,863,000 1,551,000 Corporate expenses, net of other revenues (320,000) (167,000) ------------ ------------ Operating Income 1,543,000 1,384,000 Interest expense, net of interest income (96,000) (131,000) Other 328,000 168,000 ------------ ------------ Income Before Income Taxes $ 1,775,000 $ 1,421,000 ============ ============ Identifiable Assets: Retail package store $ 2,108,000 $ 2,006,000 Restaurants 3,587,000 3,090,000 ------------ ------------ 5,695,000 5,096,000 Corporate 5,077,000 3,947,000 ------------ ------------ Consolidated Totals $ 10,772,000 $ 9,043,000 ============ ============ Capital Expenditures: Retail package stores $ 82,000 $ 4,000 Restaurants 794,000 672,000 ------------ ------------ 876,000 676,000 Corporate 58,000 132,000 ------------ ------------ Total Capital Expenditures $ 934,000 $ 808,000 ============ ============ Depreciation and Amortization: Retail package stores $ 92,000 $ 99,000 Restaurants 417,000 435,000 ------------ ------------ 509,000 534,000 Corporate 128,000 121,000 ------------ ------------ Total Depreciation and Amortization $ 637,000 $ 655,000 ============ ============ F-23 FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 14. OTHER INCOME (EXPENSE) Other income (expense) in the consolidated statements of income consist of the following for the years ended October 2, 1999 and October 3, 1998, respectively. 1999 1998 --------- --------- Non-franchise related rental income $ 36,000 $ 45,000 Loss on retirement of property and equipment (66,000) (37,000) Settlement of litigation -- 110,000 Insurance recoveries 275,000 -- Gain on sale of liquor license 30,000 -- Miscellaneous 50,000 44,000 --------- --------- $ 325,000 $ 162,000 ========= ========= NOTE 15. SUBSEQUENT EVENT On September 15, 1999, the Company entered into a contract to purchase an office building for a purchase price of $850,000. The Company intends to utilize the office building to house its corporate headquarters and to operate a package liquor store. On December 14, 1999, the Company closed on the purchase and paid the full purchase price in cash. F-24